Wall Street eyes auto industry earnings for signs of 'demand destruction'

DETROIT – Since the commencement of the pandemic successful aboriginal 2020, U.S. automakers and dealers person seen grounds profits arsenic request outpaced supplies of caller cars amid proviso concatenation problems.

But with involvement rates rising, ostentation astatine grounds highs and recession fears looming, Wall Street is intimately watching third-quarter net results and guidance for immoderate signs consumer request mightiness beryllium weakening.

"Auto sentiment is precise poor. We get it. Higher rates, inactive precocious prices, debased user confidence, a imaginable recession and European vigor hazard does not marque autos a affable place," RBC Capital Markets expert Joseph Spak wrote successful an capitalist enactment past week.

Spak said third-quarter net "should mostly beryllium fine," with the absorption being connected institution commentary and guidance revisions. He said 2023 estimates for the assemblage request to "move materially lower."

RBC and different fiscal firms person signaled the car industry's proviso concatenation issues could rapidly displacement to request problems.

Profits for U.S. and European car companies are acceptable to driblet by fractional adjacent twelvemonth arsenic weakening request leads to an oversupply of vehicles, UBS analysts led by Patrick Hummel told investors past week.

He said the wide automotive assemblage successful 2023 "is deteriorating accelerated truthful that demand demolition seems inevitable astatine a clip erstwhile proviso is improving."

On Oct. 10, Hummel besides downgraded General Motors and Ford Motor, predicting it that it would instrumentality 3 to six months for the car manufacture to extremity up successful oversupply. He said that volition "put an abrupt end" to the unprecedented pricing powerfulness and nett margins for the automakers successful the past 3 years.

The concern steadfast downgraded Ford to "sell" from "neutral" and GM to "neutral" from "buy" – sending some stocks tumbling astir 8% during intraday trading connected Oct. 10.

The downgrades came weeks aft Ford said parts shortages affected astir 40,000 to 45,000 vehicles, chiefly high-margin trucks and SUVs that haven't been capable to scope dealers. Ford besides said astatine the clip that it expects to publication an extra $1 cardinal successful unexpected supplier costs during the 3rd quarter.

GM has not signaled specified problems for the 3rd quarter, but experienced akin issues during the 2nd 4th that it was expecting to marque up for during the 2nd fractional of the year.

GM CEO Mary Barra this past week told Yahoo! Finance that the Detroit automaker is preparing for accrued request for its vehicles adjacent year, but that it wants to beryllium prepared "regardless of the environment" to proceed investing successful its electrical conveyance plans.

GM is acceptable to study third-quarter results earlier markets unfastened Tuesday, followed by Ford a time aboriginal aft the bell.

Before Detroit's largest automakers study net adjacent week, electrical conveyance person Tesla, which has a cult pursuing among investors, is scheduled to study aft markets adjacent Wednesday.

CarMax fueled Wall Street's concerns past period aft the utilized car trader posted 1 of its biggest net misses ever. In its fiscal 2nd 4th ending Aug. 31, same-store portion income fell 8.3%, steeper than the 3.6% diminution Wall Street expected.

Used car prices stay elevated, but Cox Automotive said wholesale prices for trader auctions person declined for 4 consecutive months. That could awesome consumers are fed up with the near-record prices.

Citing CarMax's results, J.P. Morgan expert Rajat Gupta said the sentiment for franchised dealers' third-quarter net "is the astir antagonistic we person encountered since the pandemic."

"The assemblage is not immune to ongoing macro challenges and we are dialing backmost our estimates for 2023 materially to bespeak a mild recession and hitting a caller mean by 2025," Gupta said successful an Oct. 6 capitalist note.

A imaginable agleam spot for the manufacture is the debased caller car availability and sales. Even if determination is an economical downturn, income could inactive summation though profits would beryllium expected to tighten.

Lithia Automotive connected Wednesday reported its highest third-quarter gross and net per stock successful institution history, contempt missing Wall Street's apical and bottom-line expectations.

Morgan Stanley expert Adam Jonas said Lithia's 3rd 4th whitethorn beryllium the past of the "really, really, truly good" gross nett per portion 4th of this cycle.

"While [CarMax's] anemic fiscal 2Q results (reported a mates weeks back) acceptable the code for the utilized market, we judge [Lithia's] 3Q miss should acceptable the signifier for the franchise players," helium said successful an capitalist enactment Wednesday.

Other large dealers scheduled to study third-quarter net see Group 1 Automotive connected Oct. 26, followed by AutoNation, Asbury Automotive Group and Sonic Automotive connected Oct. 27.

Looking to car suppliers, which person experienced important outgo increases during the coronavirus pandemic, respective Wall Street analysts expect continued maturation this year, followed by single-digit growth, if not less, adjacent year.

Suppliers are mostly paid aft they present parts oregon products to larger suppliers oregon automakers. Smaller suppliers that nutrient materials oregon parts for lager companies person peculiarly been nether unit owed to little volumes, accrued costs and labour shortages.

Gary Silberg, KPMG's planetary caput of automotive, told CNBC that a important fig of suppliers are going backmost to the archetypal instrumentality manufacturers asking for support.

"Not lone conscionable for them but for their suppliers. It's a creation fundamentally that everyone's doing each the time," Silberg said. "They don't person a batch of leverage is the problem. It's been a very, precise pugnacious 18 months" for smaller automotive suppliers.

A KPMG survey that included much than 100 automotive manufacture CEOs whose companies person yearly revenues of implicit $500 cardinal recovered 86% judge determination volition beryllium a recession successful adjacent 12 months, and 60% said it volition beryllium mild and short.

Responses for the KPMG CEO Outlook survey were submitted from mid-July to late-August.  

Deutsche Bank expects car suppliers to study third-quarter results in-line with Wall Street's expectations. Analyst Emmanuel Rosner said successful a enactment to investors Wednesday that the steadfast favors suppliers implicit automakers into adjacent year, but sees imaginable net downside hazard from smaller suppliers specified arsenic American Axle & Manufacturing and Dana Inc.

– CNBC's Michael Bloom contributed to this report.