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  • European auto stocks are stuck in the first gear.

  • This chart showing share prices falling even as earnings forecasts are upgraded says it all.

  • Investors clearly don't have much faith that those profits can continue for long.

  • Car sales have peaked in the United States and seemingly in the UK, too.

  • Investors fear that shrinking volumes and weaker pricing in the down leg of the cycle,

  • will be exacerbated by the leverage in their financial services subsidiaries.

  • These are vast undertakings, as this chart shows.

  • And in addition to generating extra profits,

  • financing operations have helped car makers

  • sell bigger and more profitable cars more frequently.

  • But could they now pose an existential threat to manufacturers?

  • Many investors worry that falling used car prices and rising interest rates

  • could expose bad lending and trigger write-downs,

  • although car makers contend that their expectations of secondhand car values

  • are actually very conservative.

  • And let's face it.

  • There is little evidence of looming stress in the bond or stock markets.

  • Finance subsidiaries can still raise funds at very, very low interest rates.

  • Volkswagen has just securitized 89,000 Spanish car loans

  • at just 38 basis points over one month Euribor.

  • That's the lowest rate for asset-backed issuance in Spain since the financial crisis.

  • And last month, Societé Générale floated its auto finance subsidiary ALD ,

  • at almost twice its book value.

  • That's a rating most banks can only dream about.

  • Moderation of the leasing boom will hurt car makers,

  • but unless the markets have got it very wrong,

  • the financial risk posed by the fincos to the automakers themselves is fairly small.

European auto stocks are stuck in the first gear.

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B2 UK FinancialTimes financial auto chart finance gear

Car stocks stuck in first gear | Short View

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    Ann posted on 2017/07/06
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