The European Central Bank’s announcement of Quantitative Easing (QE) at the start of the year can be considered a clear boost for European equity markets. There is no questioning that QE is a stimulus to an economy, just like nitro is to an engine. However, it is also true that every engine is unique and those which are more finely-tuned will perform faster and more efficiently.
The auto sector in particular is benefiting from the announcement of QE in a much more pronounced way than the market in general. Year-to-date, the ishares STOXX Europe 600 Automobiles & Parts increased by 18 per cent compared to the ishares Euro STOXX 600 which returned 10 per cent to shareholders. This represents an outperformance of eight per cent over a very short period of time.
The main reason for this strong performance is a result of many positive initiatives taken by European auto companies, all of which are leading to an improvement in margins. Just as when a car enthusiast lifts up the bonnet to appreciate the engine, an analyst looks at operating margins to appreciate valuations.
More specifically, the reason for the expected improvement in margins is similar across auto brands and stems mainly from synergies between companies sharing their platforms and engines and the opening up of production plants in low- cost countries.
The focus of increasing margins is matched by the need to increase revenues. The top line of the companies in the auto sector is being boosted by managements’ focus on new models and acceleration of growth in new and existing markets. It is interesting to note that despite the strong sales figures being reported, European production is still circa 10 per cent below its 2007 peak level. Global demand is being driven mainly by increased demand from the US, continued growth in Asia and a recovering Europe.
The following are a few companies in the auto industry which in my opinion deserve a closer look.
The top line of the companies in the auto sector is being boosted by managements’ focus on new models and acceleration of growth in new and existing markets
Daimler (the manufacturer of Mercedes) has a management team which stepped up their game and shifted its focus on design and increasing sales to the younger generation. With management’s initiatives in place, the company is geared to continue benefiting from growth in this industry. The healthy growth in the company’s cash flow also led to management announcing an increase in dividends.
Renault managed to report excellent results of late and improved margins mainly due to the success of its Dacia/entry level vehicles. This company is also focusing on cash generation and ways and means of reducing its cost base.
BMW is the leader in the luxury auto market. Its management team manages to meet car enthusiasts’ expectations by producing amazing models and shareholders’ demands with positive momentum in earnings, margins and cash flows. The BMW 2-Series Active Tourer, 2-Series Coupe and X4 are candidates for the Car of the Year 2015.
Valeo on the other hand is a supplier of auto parts to companies including BMW, Daimler and Renault, to name but a few. Apart from its focus on producing auto parts such as interior electronics, driving assistance etc, it also focuses on innovative technologies related to the reduction of carbon dioxide emissions. Products related to the reduction of carbon dioxide emissions are expected to generate three-quarters of Valeo’s sales by 2015. More stringent regulations across the globe in terms of carbon dioxide emissions, harmful tailpipe emissions and safety should continue to support Valeo’s profitability in the coming years. Higher profitability is expected to be driven by their convincing growth strategy.
The positive attributes mentioned above coupled with a weak euro and a weak price of crude are all tailwinds which should result in the auto sector pressing the accelerator on European equity performance in 2015.
The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri is one of Malta’s leading financial services firm. The company offers a wide range of investment services including independent investment advice, live online trading, savings plans, investment management and fund services. For more information visit www.cc.com.mt
Kristian Camenzuli is an investment manager at Calamatta Cuschieri.