In just a couple of weeks, Ford Motor (F) is due to report its fiscal Q2 2019 earnings — and good news: Just last week, Ford revealed that based on preliminary results, Q2 looks to have been its strongest sales quarter in 15 years for the sale of pickup trucks.
Echoing this happy tune, Ford rival Tesla (TSLA) blew away sales expectations for sales of its paradigm-shifting electric cars last week, reporting that in Q2 it produced more than 87,000 electric vehicles — and delivered more than 95,000 of them! 7,400 more cars were “in transit,” explaining why the numbers didn’t exactly match up, and suggesting that despite a lot of naysaying on Wall Street, consumers are still buying Teslas just as fast as the company can churn them out.
And yet, if all of this is true… why is investment banker RBC Capital looking so glum?
Earlier this week– but after both Ford and Tesla had revealed their news — RBC analyst Joseph Spak released his bank’s “earnings preview” on the automotive industry in Q2 2019. And newsflash: He’s not optimistic.
Despite positive preannouncements from two of the biggest names in the sector, Spak warns that things are looking “tougher” for the industry than appeared to be the case heading into Q2. According to his estimates, June car sales for the North American car industry will be down 2% in comparison to April sales figures, and down 2.8% year over year. European sales in June are looking relatively stable compared to April — but down 7% year over year. Worst of all is China, where Spak forecasts a year over year sales decline of 16% for Western carmakers.
Nor can investors expect to get much relief as the year wears on. By Spak’s estimation, H2 2019 forecasts are “too high,” and the analyst is warning investors to expect “misses and guide-downs” as automakers report disappointing earnings, and roll out new guidance for more of the same in their Q2 earnings reports. Whereas London-based market researcher IHS Markit has been forecasting a modest 0.7% increase in car production in this year’s second half, Spak believes it’s more prudent to expect a decline – of perhaps 1.2%.
And even there the bad news doesn’t end. According to Spak, the “global automotive recession” that the analyst believes is already underway could extend all the way through 2019 and as far out as Q2 2020 (even if, as the analyst concedes, sales could be only “barely negative” in Q2 2020).
So how is Spak looking at Ford and Tesla in the context of both their sales announcements, and Spak’s own negative forecast for the industry as a whole? Perhaps unsurprisingly, the analyst is trusting in its own predictions, and discounting the happy talk coming out of the companies themselves. For Ford, for example, the analyst believes Q2 earnings will come in $0.03 below consensus estimates, at about $0.28 per share. That being said, Spak predicts investors will look past the miss, and could forgive Ford if it gives better guidance than what the analyst expects.
On Tesla meanwhile, Spak remains generally “negative,” and insists the company probably “sacrificed profitability for units” in order to generate its sales beat. That being said, Q2 news will probably be “contentious,” and in a warning apparently directed towards shorts, Spak notes that “it’s possible that TSLA is FCF break-even this quarter … or even positive.”
Long story short, even if profits eluded Tesla in Q2, bulls could still find a reason to bid Tesla stock up.
All in all, Spak rates Tesla stock an Underperform (without suggesting a price target), and largely sidelined on Ford with a Market Perform rating and $10 price target. (To watch Spak’s track record, click here)
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