2023-11-05 09:06:04 ET
Summary
- Ford, General Motors, and Tesla report disappointing Q3 results, while Toyota sees bumper earnings.
- American car companies underperform due to UAW strikes and structural differences in the industrial environment.
- Japanese carmakers, including Toyota, are gaining ground in the US market and outpacing American counterparts in profitability.
- The large interest rate differential for the Dollar vs. the Yen causes a tailwind and headwinds for Japanese and U.S. exporters, respectively.
- In my opinion, it is best to avoid the U.S. automotive complex; and buy Japanese carmakers/Toyota instead.
The American automotive industry is not doing well, with Ford (F) and General Motors (GM) and Tesla (TSLA) all reporting a disappointing set of Q3 results. Only Stellantis (STLA), which has also a very strong presence outside the U.S. managed to score better than expected earnings. Meanwhile, Japanese car giant Toyota (TM) reported bumper earnings for Q3, with operating profits up more than doubling YoY.
A look at the share price performance confirms the story: Shares of Ford, General Motors, and Tesla have lost 24%, 28% and 12% YTD, respectively, while Toyota Motor's equity value is up 26%.
One reason for the strong underperformance of American car companies is certainly related to the UAW strike headwinds, a matter that received substantial media coverage. Stellantis' Q3 report indicates that these work stoppages had an adverse impact on the company's net revenues equal to about $3 billion . While precise numbers have not been disclosed by either Ford or General Motors, the impact on revenue has likely very similar.
Although the Detroit automotive giants have now settled an agreement with the UAW, pending voting approval of the union's members, investors should consider the long term consequences of the deal, which includes a substantial 25% wage increase for workers over a four-and-a-half-year period. In that context, I would like to point investors' attention to calculations provided by equity analysts at Deutsche Bank ( Deutsche Bank: Automotive industry equity research note, dated 26 October ), who are estimating that the cumulative impact on operating profits for the OEMs could be as high as $19.7 billion, or about $1.3-1.5 billion annually for each of the carmakers. To put these numbers into context, the expected EBIT headwind for Ford, General Motors and Stellantis is estimated at 17%, 13%, and 7%, respectively.
Meanwhile, Toyota is not expected to see a similar EBIT headwind over the next few years. And while the UAW impact looks like a one-off event, on a structural perspective it is not. In fact, the UAW strike and consequences highlight a structural difference in the U.S. vs. Japanese industrial environment. Compared to Japanese work agreements, U.S. car companies are much more burdened by workers' bargaining power, including pensions and healthcare benefits for retirees, which can add significant expenses to the cost of producing vehicles and loss of competitive advantage.
On a gross profitability perspective, Toyota is leading Ford and General Motors by 740 and 550 basis points, despite lower ASP for Toyota cars. On EBITDA, the lead for Toyota is 290 basis points against both companies. Compared to Tesla, Toyota is slightly lagging; but not much.
As an additional thought bite, investors should note that Japanese carmakers are winning against the Detroit Three, in the United States . Year to date, Detroit Three have only sold about 333k cars (+6.4% YoY) in the U.S., while Japanese car makers have sold 1,158k (+13% YoY). Not only are Japanese car makers selling about 3 times as many cars, there market share is also expanding over U.S. car makers. Year to date, the Detroit Three have lost 60 basis points market share, while Japanese won 100 basis points. Even the Europeans won market share (+40 basis points). A similar dynamic of market share movement can be observed when accounting also for light trucks. Source: Bank of America's (BAC) monthly automotive industry tracker, for September.
Toyota's win in the U.S. is certainly supported by a weakening Yen, and a strengthening U.S. Dollar. But here again: The secular strength of the Dollar is something that is not transitory, but structural -- pressuring the competitiveness of U.S. automotive companies. The yen is presently testing 33-year lows against the dollar, driven by the widening gap between Japanese and U.S. interest rates.
To quantify the tailwind of currency support, I point to Toyota's most recent Q3 print : In the September quarter 2023, the world's leading car manufacturer in terms of sales reported an operating profit of ¥1.4tn ($9.5bn), a 149% increase from the ¥563bn achieved during the same period the previous year. Commenting on the bumper earnings growth, Toyota management confirmed that the performance bolstered by a weakened yen, which magnified its success in selling more cars across all regions. Toyota noted that for every ¥1 decrease in value against the dollar, it gains ¥180bn in benefits.
Toyota continues to see a FX tailwind for the foreseeable future. And so do I, as long as the enormous carry trade in interest rate differentials persists. While Ford has withdrawn previously stated full year guidance, Toyota has strengthened it, raising sales forecast to 43,000 billion yen, up from 38,000 billion yen estimated previously. Operating margin forecast expanded from 7.9% to 10.5%.
Lastly, to highlight Toyota's momentum, I point investors' attention to Seeking Alpha's quant factors -- with Toyota outcompeting key U.S. peers on all metrics except valuation. Cumulatively, out of 534 companies, Toyota is ranked #2 according to Seeking Alpha's quant analytics, while Ford, Tesla, and General Motors are ranked #179, #161, and #77, respectively.
Investor Takeaway
The American automotive industry is facing challenging times, with major players such as Ford, General Motors, and Tesla reporting disappointing Q3 results. In contrast, Toyota, the Japanese automotive giant, reported impressive earnings, with operating profits more than doubling YoY. The underperformance of American car companies is partially attributed to the recent UAW strikes, which had a substantial impact on their revenues. However, while labor disputes have been resolved, the long-term consequences, including a substantial wage increase for workers, should be carefully considered. Deutsche Bank estimates that this could result in a cumulative impact on operating profits of up to $19.7 billion for the American automakers, pressuring the competitiveness of the U.S. automotive complex. Another key driver of the U.S. automotive industry's underperformance is the large interest rate differential for the Dollar vs. the Yen, which causes a tailwind and headwinds for Japanese and U.S. exporters, respectively.
On the backdrop of these structural trends, Japanese carmakers, incl. Toyota, are gaining ground against their American counterparts in the U.S. market, with a notable market share expansion. Moreover, Toyota outpaces Ford's and General Motors' profitability by significant margins, but with a slight lag compared to Tesla.
In my opinion, as long as Japanese car makers lead the cost benchmark in the automotive industry (take the gross margin as guide), and rates differential between the U.S. and Japan persist to such an enormous extend, it is best to avoid the U.S. automotive complex; and buy Japanese carmakers/ Toyota instead.
For further details see:
Automotive: Dump Made In Detroit, Buy Toyota Instead