‘Long China, short Europe,’ Wells Fargo says in auto sector analysis (NYSE:BWA)

BorgWarner technical center. BorgWarner designs and builds transmissions as well as components for electric vehicles. — jetcityimage/iStock Editorial via Getty Images

A recovery from COVID-driven production halts should promote growth for China-exposed auto manufacturers and suppliers, while an escalating energy crisis leaves Europe unattractive, according to Wells Fargo.

In a note to clients ahead of earnings season, a team of analysts at the bank led by Colin Langan indicated that conservative estimates for many automakers has alleviated much of the downside risk in the coming reports. Indeed, much of the auto space is expected to hit the reeled-in consensus expectations and already-conservative full-year guidance put forth by most management teams in their coverage.

“We expect more than half our coverage to hold guidance with the remainder guiding near the low end of current ranges,” Langan told clients. “[BorgWarner] (NYSE:BWA), [Aptiv] (NYSE:APTV), and [Visteon Corp.] (NASDAQ:VC) screen best, partially helped by their high China mix. With low investor expectations, holding guidance will likely be viewed positively.”

The three aforementioned suppliers were cited as “most likely to beat” expectations based upon the expectation of a stronger-than-appreciated recovery in light vehicle production in China. BorgWarner (BWA), Aptiv (APTV), and Visteon (VC) garner 24%, 22%, and 20% of their respective sales from the region, according to the bank.

“Aptiv (APTV) should benefit from Tesla’s 42% q/q growth, VC should benefit from the recovery of [General Motors] (GM) China JVs (+35% q/q), and BWA should benefit from conservative margin guidance,” Langan wrote. “We are slightly above GM Q3 estimates, though the quarter will likely depend on the completion of the ~90K partially assembled vehicles in Q2. We are assuming GM completes half, which will result in GMNA deliveries being up >10% q/q.”

Additionally, Autoliv (NYSE:ALV) was touted for its 21% sales exposure to China.

However, an uptick in Chinese production and tempered expectations are offset by increasingly adverse conditions in Europe, according to the analysis. While global production is expected to tick upward due to recovery in China, a 20% and 29% cut to European light vehicle production is expected in the fourth quarter of 2022 and first quarter of 2023, respectively.

“We see only downside risk to FY guidance given the weakness in Europe (33% of avg supplier sales), rising FX headwinds, and potential work stoppages from the EU energy crisis,” Langan said. “Overall, we see [Magna International] (MGA) & [Lear Corporation] (LEA) as most at risk of missing & lowering guidance. Both screen below average in our Q3 platform analysis and have high EU mix.”

Ford’s (F) production is also expected to be negatively impacted by European recession driven by spiking inflation and energy costs. Production is expected to fall “as much as 10%,” according to the bank’s analysts. “We are lowering our 2022-23 EPS estimates to reflect the impact from lowered global production and an energy inflation crisis,” Langan wrote. “We are lowering our 2022E from $2.00 to $1.95, and our 2023E from $1.20 to $1.15.”

GM (GM), by contrast, is expected to be buoyed by exposure to China and easing of semiconductor shortage impacts allowing it to maintain EBIT guidance. Nonetheless, Langan’s team rated General Motors (GM) at a Sell-equivalent alongside Ford (F), based upon its Cruise stake, revised pension obligations adjusting for increased interest rates, and persistent inflationary pressures.

Indeed, the overall take despite upbeat commentary on China was one of pessimism.

“We are lowering our estimates across our coverage to reflect both the significant increase in FX headwinds and the incorporation of potential EU energy crisis related work stoppages and inflationary costs,” Langan concluded.

Alongside the EPS revisions downward, price targets were trimmed across much of the bank’s coverage as well.