BMW, Daimler profit warnings hit shareholder value

Continued uncertainty over international trading conditions, profit warnings from two leading German automakers and the sudden death of a chief executive all contributed to declines seen in the latest Automotive News Europe/PricewaterhouseCoopers Transaction Services Shareholder Value Indices.

In the third quarter of this year BMW shed 0.3 percent of its value and Daimler 1.7 percent, while PSA Group surged ahead by 18.8 percent. Overall, automakers were up 2.2 percent in the second quarter, while suppliers lost 10.3 percent of their value and retailers 7.4 percent.

The small gain by automakers in Q3, which followed a drop of 10 percent in shareholder value in the preceding three months, masked significant differences in performance between individual companies. All six of the European automakers included in the index did better in Q3 than in Q2, with two recovering from negative to positive outcomes and three markedly slowing the rate of loss in shareholder value.

Once again, the best performance by far came from the French PSA Group, which includes Peugeot, Citroen, DS and most recently Opel/Vauxhall. The rescue plans introduced by CEO Carlos Tavares following heavy losses in 2014 has continued to deliver. In the first six months, lifted by strong sales of the Peugeot 3008 and 5008 SUVs, PSA revenues rose 40 percent to 39 billion euros, while net income was up 18 percent to 1.48 billion euros.

The operating margin on its French brands was 8.5 percent – well ahead of the target set in 2016 of 6 percent by 2021. And by applying a similar cost discipline at Opel/Vauxhall, which it acquired a year ago from General Motors, PSA has already brought what had been a persistent and heavy money loser back to profit with a 5 percent operating margin. Investors reacted favorably to this continued progress, with the group's shares reaching a 10-year high during Q3.

Other automakers, however, have not fared so well, with the possible effects of the growing international trade war continuing to create considerable uncertainty for the auto sector. This volatility is only partially reflected in the quarterly index. BMW's stock price, for example, which had started the year at 86.40 euros reached 96.26 euros by January 22. But by March 5 it had fallen back to 83.49 euros, recovered to 93.30 euros on May 17 and then slumped to a low for the year of 77.65 euros at the end June.

That volatility continued into Q3, exacerbated by a profit warning which caused investor concern across the whole auto sector. Having recovered from its late-June position to reach 85.77 euros by September 21, the stock lost 5 percent of its value in a single day in response to that warning and relinquished more ground as the quarter progressed. It finished the quarter virtually where it had started, at 77.71 euros, before falling further in early October to another new low for the year.

BMW told investors its 2018 revenues and profits would likely fall due to the costs of implementing new emissions standards in Europe and rising uncertainty stemming from the escalating global trade war. A significant proportion of its U.S. production is sold to China and will be affected by increased tariffs. BMW had already said 2018 would be challenging because of the more than 1 billion euros in investments it is making in mobility and to currency headwinds.

Daimler, too, which also sells cars produced in the U.S. into China, warned that the heightening trade war between the two countries could affect its profitability this year. It lost just 1.7 percent of value in Q3, having fallen 15.4 percent in the preceding three months.

However, another German automaker, VW, achieved a significant turnaround, turning an 11.2 percent drop in shareholder value in Q2 into a 4.9 percent gain in Q3. This was despite its stock having started the latest quarter at a year low of 141 euros and hitting a new low of 136 euros in early September before recovering strongly to 154 euros by the quarter end.

It was a similar story for other automakers. The sudden death of CEO Sergio Marchionne had a sharp and immediate effect on Fiat Chrysler's share price, which dropped 15.5 percent in a single day. It gradually recovered over the quarter, but as the shareholder value index reveals, it followed Q2's 1 percent fall in value with a further drop of 7.3 percent in Q3 – the biggest decline recorded for any of the automakers in the three-month period.

Renault achieved the biggest turnaround of all, however, following a 22.6 percent decline in value in Q2 with a 2.3 percent rise in Q3. Starting Q3 at a low for the year, it dropped 3 percent in the space of two weeks, then gained 11 percent over the following week.

So, as can be clearly seen, while the auto manufacturing sector as a whole halted the second-quarter decline in the third quarter, the picture was far from uniform and characterized by an exceptional level of volatility.

Uncertainty extends to suppliers

The uncertainty about the future extended down the value chain to suppliers. The sector fell 13 percent in Q3 following a 7.5 percent decline in value in the preceding quarter.

German lighting and electronic components manufacturer Hella contained its fall in shareholder value to 0.5 percent. At the bottom of the table ElringKlinger dropped 24.5 percent – exactly the same percentage drop it recorded in Q2 following its 27.1 percent fall in Q1. The German gasket and plastic components manufacturer has lost about 55 percent of its shareholder value since its year's high at the end of January.

The weakest performance in Q3, however, came from the French-based fluids transfer and mechanisms specialist Akwell (the supplier formerly known as MGI Coutier). It lost 30.4 percent of its shareholder value in the space of the three months, following a 13.7 percent decline in Q2.

Retail picture mixed

At the retail level the overall picture was also mixed. A 13.2 percent rally in shareholder value in Q2 reversed Q1's 11.8 percent decline. But double-digit percentage declines for both the Birmingham, England-based Vertu Motors (-13.4 percent) and global retailer Inchcape (-13.8 percent) pulled the retail index as a whole down 7.4 percent in Q3.

Here again the underlying story was more complex. In Q2 Vertu had gained 14.9 percent and Inchcape 14.8 percent – so the net effect for both companies over six months was pretty much neutral. Q2's best retail performer, with a gain of 26.2 percent, had been the UK multi-franchise main dealer group Lookers. But in Q3 it dropped to mid-table with a small fall in value of 2.5 percent.

Pendragon, however, which operates some 300 franchises across the UK, extended its 7.5 percent Q2 gain by rising 13.9 percent in Q3. Despite reporting a 41 percent drop in first half pre-tax profits on an almost unchanged sales revenue, the company benefitted from positive coverage by analysts.