High-end carmakers such as Mercedes, Bayerische Motoren Werke AG (BMW) and Volkswagen AG (VOW)’s Audi tend to weather downturns better than mass-market auto manufacturers like Renault and Fiat SpA because wealthy consumers still have money to spend even when the economy slows, investors and analysts said.
“German premium-auto manufacturers are by far the best bet,” said Juergen Meyer, a fund manager with SEB Asset Management in Frankfurt. “BMW, Audi, Mercedes and Porsche are the most stable investment havens. I continue to be very relaxed” about the prospects for the largest luxury-car makers.
Concern about a slowing global economy heightened after Standard & Poor’s downgraded the U.S.’s credit rating and the European Central Bank began buying Italian and Spanish government bonds, prompting investors to sell auto stocks. The Euro Stoxx Automobile and Parts Index lost 35 billion euros ($50 billion), or 19 percent, of its value this month in the worst run since November 2008. The 14-member index rose as much as 4.5 percent today.
Buying on Drop
Fiat, the Italian carmaker that controls Chrysler Group LLC, has led the sector’s decline with a 25 percent drop this month, followed by Daimler’s 23 percent fall. Automakers are closely tied to the economy because consumers tend to delay major purchases when they’re worried about the future. For some investors, the declines have made the stocks attractive.
“After the recent slump, we are buying VW and Daimler, which is actually our favorite stock in the sector because it has very good margins and a good penetration in emerging markets,” said Patrizio Pazzaglia, head of financial investments at Bank Insinger de Beaufort NV in Rome. “We prefer German carmakers and are skeptical of the French ones. Fiat may be a good opportunity as the integration with Chrysler is faster than expected.”
In a sign that consumers are becoming wary of making major purchases, car dealers in Germany raised discounts last month. Average rebates in Europe’s largest auto market were 11.2 percent in July, compared to 10.5 percent in June, according to a monthly survey from Autohaus PulsSchlag. Fiat, the leading discounter, increased its rebates to 14.4 percent from 12.2 percent. Audi had the lowest incentives at 8.9 percent.
Volkswagen, which is combining with Porsche SE and also owns Lamborghini and Bentley, is the most recommended European carmaker, with 85 percent of analysts rating the stock a “buy,” according to Bloomberg data. Daimler is second with 71 percent, while 44 percent recommend Renault and 47 percent advise buying PSA Peugeot Citroen. (UG)
Other European automotive companies are also in favor. Truckmaker Volvo AB (VOLVB) is rated a “buy” by 73 percent of analysts, while tire and car-parts maker Continental AG is recommended by 79 percent of analysts.
BMW, Audi and Mercedes, the world’s three largest makers of luxury vehicles, are all targeting record sales this year as growing wealth in China fuels deliveries and historically high profit margins. The strong earnings have been used to boost financial reserves.
Daimler plans to maintain a “reasonable cushion” of cash in light of potential volatility in the global economy, Chief Financial Officer Bodo Uebber said in a March 14 interview. The Stuttgart, Germany-based manufacturer, which is also the world’s largest truckmaker, had 11.5 billion euros in net liquidity at its industrial operations at the end of June. Renault’s net automotive debt was 1.22 billion euros on June 30.
“German carmakers’ financial reserves are in better shape than those of French or Italian manufacturers,” said Aleksej Wunrau, an analyst at BHF-Bank AG in Frankfurt. “That might give them an edge in a possible crisis scenario.”
Still, with much of the growth and profits of luxury-car makers tied to China, they may be vulnerable to a global slowdown as the Asian country’s economic expansion cools.
“If there will be a double-dip recession, it’s a sector to avoid, German carmakers included, because the emerging markets will also slow at that point,” said Emanuele Oggioni, who oversees about 600 million euros at Saint George Capital Management in Lugano, Switzerland.
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