September 10, 2013 5:14 pm

European cars: kicking the tireds

Investors seeking bargains should steer carefully
©Bloomberg

Motor shows are by definition puffy affairs. Everyone is entitled to go hyper about a million-dollar eco-friendly hot rod – or some similar bit of hucksterism – once in a while. But some noises emanating from the Frankfurt event this week suggested such exuberance is in danger of spilling over from latest products to the economic prospects for Europe’s automotive sector. It should not.

Gear changes

Gear changes
Total return indices (rebased)

For all the insistence that the sector has bottomed out, monthly car sales figures are still as prone to potholes as a dirt track. New car registrations in the European Union in the first half of 2013 fell 7 per cent from the same (depressed) period of 2012, according to industry data. More recent estimates from consultants LMC Automotive, meanwhile, suggest that while western European car sales rose 4 per cent year-on-year in July, they promptly tumbled again by over 5 per cent in August. That leaves 2013 year-to-date sales down by over 9 per cent in France and Italy; by 7 per cent in Germany: and by 4 per cent in Spain. Only the UK bucks the trend, with a rise of 10 per cent.

Investors, of course, need to look forward. On this score, Renault boss Carlos Ghosn thinks Europe will return to very modest sales growth next year – 0-1 per cent. His Peugeot counterpart Philippe Varin sees a “slightly positive” number. That is more cautious than some market estimates: Goldman Sachs forecasts a 3 per cent improvement in 2014 and close to 5 per cent in 2015. But even the higher numbers would only begin to mop up the region’s spare production capacity: LMC puts this at 29.5m units, 50 per cent higher than actual output. Profit-wise, too, new car purchase incentives remain prevalent in core markets, actually edging up in Germany last month.

All of which explains why ratings remain modest: a 2014 price to earnings ratio of 10 makes autos one of Europe’s cheapest cyclical sectors. Investors seeking bargains should pick carefully, though. Where carmakers are in their product cycles may be as important as the local market for a while yet.

Email the Lex team in confidence at lex@ft.com

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