Presentation To Detroit CFA Society US Automotive
Global Securities ResearchJanuary 13, 2014Presentation to Detroit CFA SocietyUS AutomotiveColin LanganAnalystTel: 212 713 9949Colin.Langan@ubs.comThis report has been prepared by UBS Securities LLCANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON SLIDE 20UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interestthat could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Presentation Outline US auto sales outlook US market share outlook Europe auto sales outlook Global auto sales outlook Historical sector valuations GM – Buy Thesis VC – Buy Thesis Ford – Buy Thesis Auto dealers – Sell Thesis Questions1
2013 SAAR 15.5m; 2014 Forecast 16.0mWe forecast 2014 SAAR of 16.0m and 2015 SAAR of 16.2mOur 2014 forecast implies 3% y/y growth, slower than the 11% CAGR over the last 4 yearsOur forecast is consistent with UBS econometric model forecast U of M Index of Consumer Confidence (79% correlation) Used Vehicle Pricing (45% .811.21210.81413.01615.01814.52016.1US Auto Sales History and .510.0 11.0 11.2 '12'13'14E 8.19.110.3 11.0 11.4 10.2 .57.77.87.66.85.45.66.17.27.67.98.1-10.8 13.0 14.5 15.0 13.8 11.2 10.5 10.4 12.1 14.2 15.4 16.1 14.9 15.5 14.5 13.9 12.3 12.9 13.9 15.1 14.7 15.1 15.1 15.5 16.9 17.3 17.1 16.8 16.6 16.9 16.9 16.5 16.1 13.2 10.4 11.6 12.7 14.4 15.5 16.0 16.2Source: Wards, UBS2
Slowing Growth, But Still PositiveMixed Leading IndicatorsAuto Industry Indicators Manheim used car prices near record highs and likelyfall with higher lease returnsLastUpdateCurrentPriorMonthPrior Year M/M Y/YUS Sales TrendDec-1315.316.3015.2 U of M Conditions for Buying NewDec-13134120130 Manheim IndexNov-13122.4122.3122.6 Used CPINov-131.4871.5011.475 UBS Survey FinancingDec-1315%16.0%22% Incentives (Autodata)Nov-132,6672,5742,490 Still recovering from worst decline in 70 years (2009)Average New FICO ScoreNov-13631635655 Record vehicle ageMacro IndicatorsUnemploymentNov-137.0%7.3%7.8% Housing & employment support growthHousing StartsNov-131.0910.8890.842 U of M solid but only slightly above historic average Interest rates likely riseUnderlying fundamentals still solid Only approaching "normalized" level of salesU of M Index: Conditions for Buying New 092010201120122013140ManheimUsed CPI80%Tighter70%More Lenient60%50%40%Decade Avg30%20%10%60 /- 1 Std DevSource: Manheim Consulting,US Department of Labor, UBSAuto Credit 3Manheim Index vs. Used CPISource: FactSet, CNW, AutoData, UBSSource: U of M Consumer Survey0%M-07M-08M-09M-10M-11M-12M-13Buying Conditions 3M AvgSource: UBS Dealer Survey3
Normalized Demand 16m to 17mNormalized US Sales OutlookBottoms up analysis points to"normalized" demand of 16m to 2.812.213.113.213.3New "Normal" US Sales15.115.615.816.716.817.0US Sales Estimate11.712.714.515.516.016.2Ending Density1.221.211.211.211.211.21Source: Polk, Dept of Transportation, UBSLogarithmic trend (more appropriate vs. Linear) also suggests a 16m "normalized" demandAuto Sales Trend - Logarithmic/GrowthAuto Sales Trend - Linear19,00019,00017,000R 2 2015E5,000Base CaseSource: Wards, 00720092011E2013E2015E17,000R 2 65%Linear (Actual)Base CaseLog. (Actual)Source: Wards, UBS4
US Market ShareUS Light Vehicle Market %17.0%0 bp-120 %15.6%40 bp20 .4%14.1%0 bp-30 %0 bp20 bpNissan7.2%7.4%7.9%8.2%7.9%7.9%8.0%7.3%8.6%8.1%10 bp80 2%10 bp70 bpHyundai / Kia5.1%7.1%7.7%8.9%8.7%8.7%8.1%7.3%8.2%7.1%-60 bp-20 bpVW / Audi2.4%2.8%3.1%3.5%4.0%4.0%3.6%4.4%3.6%3.8%-40 bp-60 bpBMW2.3%2.3%2.3%2.4%2.4%2.4%2.4%3.2%2.9%3.3%0 bp0 bpPorsche0.2%0.2%0.2%0.2%0.2%0.2%0.3%0.2%0.3%0.2%0 bp0 0 bp40 bpMazda2.0%2.0%2.0%2.0%1.9%1.9%1.8%2.0%1.7%1.7%-10 bp-30 5%0 bp20 0%0 bp0 bpAssemblerJapan 3OthersYTDMonthy/yy/ySource: WardsUS market long-term share evolutionGM and Ford long-term market it 3Source: WardsJapan sGMSource: WardsFord5
GM: New vehicle launches in the last 12 monthsGM: Vehicle Launch Summary Q1 2013 to Q1 2014BrandProductSegmentQTR%CadillacCTSMid-Size CarQ3 20132%CadillacCTSMid-Size Sports CarQ1 20140%CadillacELRCompact CarQ4 2013NewCadillacEscaladeFull-Size SUVQ1 20141%CadillacEscalade ESVFull-Size SUVQ1 20140%ChevroletCorvetteCompact Sports CarQ3 20131%ChevroletSilveradoFull-Size PickupQ2 201313%ChevroletSilverado HDFull-Size PickupQ1 20144%ChevroletSuburbanFull-Size SUVQ1 20142%ChevroletTahoeFull-Size SUVQ1 20143%GMCSierraFull-Size PickupQ2 20135%GMCSierra HDFull-Size PickupQ1 20141%GMCYukonFull-Size SUVQ1 20141%GMCYukon XLFull-Size SUVQ1 20141%Total General Motors33%Source: Global Insight, UBS estimates6
Ford: New vehicle launches in the last 12 monthsFord: Vehicle Launch Summary Q1 2013 to Q1 2014BrandProductSegmentQTR%FordTransitFull-Size VanQ1 20145%FordTransit ConnectCompact VanQ4 20132%LincolnMKCCompact CUVQ4 20130%Total Ford7%Source: Global Insight, UBS estimates7
European Sales: Expect a Modest Recovery from Trough LevelsWe forecast European auto sales to be up 3% in 20142013 Est. Sales vs. Peak W. European sales have started to stabilize at weak levelsTotal Europe-20.3%Western Europe Modest rebound in Germany and U.K.-23.9%Eastern Europe-11.2%Central Europe Spain boosted by scrappage incentives; Italy likely to follow-42.6%GermanySales are still tracking 20% below peak-20.4%U.K.-12.7%France 2013 sales were a new trough-20.3%Italy 2013 est. sales of 17.8m well below peak of 22.3m-49.3%Spain-57.3%Netherlands Western and Central Europe recovery slower vs. Eastern Europe-37.4%Belgium-14.6%0%-20%-40%-60%-80%Source: Global Insight, UBSEurope Auto Sales History and ForecastWestern EuropeGermanyFranceItalySpainUKEastern EuropeRussiaTotal 932,93019,123Source: Global Insight, UBS8
Emerging markets sales outlookVehicle density (per 000) vs. GDP per capita ( )1,000R² oIndia-CanadaSpainNetherlandsCzech RepublicJapanUKGermanyHungarySouth ance20,00030,00040,00050,00060,000Source: Bloomberg, CEIC, Government Statistics Departments; Based on 2010 dataGreater China Auto Sales (million units)Brazil Auto Sales (million units)20.017.3 18.019.01.41.31.51.620054.5 5.11.51.520033.38.3 8.91.320022.2 200220012000Source: Global Insight, 201125.04.0201025.226.920124.530.0Source: Global Insight, UBS9
GM: Buy Rating, 50 Price TargetSolid recovery in the US full size pickup market We forecast 2014 full size pickup sales of 2.1m (up10% y/y) & segment share of 12.9% (up 90 bps y/y)US full size pickup sales and segment share16.0%3.0014.0%2.5012.0%2.0010.0%8.0%1.50 Segment share still well below peak level of 14.8% Strength driven by a housing recovery & shale growth6.0%1.004.0%0.502.0%0.0%US full size pickup sales 921990198819861984198219800.00Full size pickup segment shareSource: Ward's, UBSGM's pickup share to benefit from K2XX launchGM 2013 to 2014 Market Share Analysis19.0% Full benefit of K2XX pickup launch will kick-in in Q11418.8% K2XX based heavy duty pickups and full size SUV18.4%launch in H114 to provide further share boost High segment brand loyalty; historically each launch0.3%0.0%0.2%18.6%18.1%0.1%18.2%0.3%0.1% 18.3%0.2%0.1% 0.1%18.0%17.8%17.6%from GM or Ford has resulted in a 3-7% share swingSource: Ward's, UBS10
GM: Buy Rating, 50 Price Target2013: Estimated incremental profit per unit by typeHigher pickup mix will drive margin expansionLarge Pickups 14.0kLuxury Car We forecast GM's 2014 NA EBIT margins to be 9.3%, 13.0kSUVup 130 bps y/y 12.0kCUV 10.0kTotal Light Vehicle Strong pickup mix will drive 2014 margins as pickups 9.6kLarge Car 7.0kMid Carhave the highest pre-tax profit contribution 6.5kMid Pickups 6.0kVan 6.0kSmall Car 5.0k 0.0k 2.0k 4.0k 6.0k 8.0k 10.0k 12.0k 14.0k 16.0kSource: UBS estimatesGM: Estimated excess liquidity ( bn)Returning cash to shareholders Management has a positive tone on returning cash toshareholders through share buybacks and/or dividends We estimate that GM will have excess liquidity of over 2.5bn ending Q3 2013. Completed over 5bn repurchase from UST in 2012;Canadian government & UAW VEBA still own um liquidity to stay investment grade26242220Q3 2013Grossliquidity(-) Series ApreferredsSource: UBS estimates(-) Debtpaydown( ) Q4 2013FCF2013-endGrossliquidity( ) FY 2014FCF2014-endGrossliquidity11
Visteon: Buy Rating, 96 Price TargetCompelling sum-of-the-parts value VC shares do not give full credit to the appreciation and further upside in Halla stock price VC electronics is not fully reflected in the stock priceAnalysis of Visteon Share PriceSource: Company reports, FactSet, UBS estimates; Note: Halla's current price of KRW 35,700 implies 50 per share in value to VCUBS Korea analyst has a Halla price target of KRW 44,000 implying 62 per share in value to VCBreakup still possible but not urgent VC will likely divest interiors by mid year Focus to be on growth in climate & electronics12
Visteon: Buy Rating, 96 Price TargetDiscount to peers VC is trading below the supplier average despite the expected growth in Electronics & Climate We believe the discount will narrow as the company highlights its growth outlookVisteon 2014E EV/EBITDA vs. peersNote: EV and EBITDA is adjusted for unfunded pension and OPEB liabilities and pension and OPEB expense.Source: Company reports, UBS estimates, FactSet13
Ford: Buy Rating, 18 Price TargetFord: Regional pre-tax profit summary2015 to be a record year after a transitional 2014 Ford to launch its pickup in H214, full benefits by Q115North AmericaSouth America NA margin to rise from 8.6% in 2014 to 10.9% in 2015Europe European margins to return to profitability in 2015 asAsia Pacificthe benefits from Genk, Belgium plant kick-inOther/Other AutomotiveTotal Autos S. American margins to as currency issues subsideFinancial ServicesPretax Income:TaxMin InterestNet 12)6,1805,5966,4735,6088,796 1.51 1.41 1.60 1.40 2.20Source: Company data, UBS estimatesProduct momentum to intensify over few years Ford plans to launch 23 vehicles in 2014 The new full size pickup will offer more aluminum,significantly lowering weight and raising fuel economy Ford is adding 3 mfg. facilities - 2 China & 1 in Brazil Consistently gaining share in China from a low base14
Bearish on Dealers: AN (Sell, 49 price target) & SAH (Sell, 21 price target )Potential risk from Consumer Finance Protection Bureau (CFPB) CFPB's March bulletin highlights discriminatory dealer markups Potential actions include flat fees, flat markups, and caps on markups We estimate that potential CFPB actions put 33% of dealer profits, on average, at riskDealer Financing F&I Risk Analysis1ANSAHPAGGPIABGLADAvgF&I % of Sales4%3%2%3%4%3%3%F&I % of Gross Profit23%20%16%23%22%21%21%Financing %33%40%35%135%30%35%135%% US Sales100%100%64%94%100%100%93%Gross Profit % from Financing F&I7.6%8.1%3.6%7.7%6.5%7.3%6.8%Financing F&I Gross Profit188.5100.272.385.550.039.3Financing F&I SG&A Estimate (20% Gross)-37.7-20.0-14.5-17.1-10.0-7.9Financing F&I Operating Income150.880.157.868.440.031.4Financing F&I % of Total Operating Income23%33%16%30%22%21%Financing F&I Net Income92.649.638.942.625.019.4Financing F&I % of Total Net Income29%49%20%43%30%24%24%33%Company did not provide an estimates, this is based on industry average of 35%Source: Company data, UBS ests.Analysis published on 5/21/2013 in our report titled: Peak Valuations Despite CFPB Risk15
Bearish on Dealers: AN (Sell, 49 price target) & SAH (Sell, 21 price target )Dealer valuations remain high relative to historical range Despite significant earnings risk from CFPB, dealer valuations are at or near all time highs Rising interest rates could further taper earnings as dealer finance inventory through variable rate debt Investors have been moving away from defensive names to names with higher operating leverageAuto dealer P/E rations on 2014 consensus ests.181614.915.514.8 14.61415.2 14.814.413.6 roup 1Automotive2014 P/ESonicAutomotiveAsburyAutomotiveLithia MotorsHistoric Avg.Source: Company data, Factset, UBS16
Thank youAny Questions?17
BackgroundColin Langan, CFA, CPAUS Automotive AnalystAnalystphoto goeshere*Colin Langan is a director in the general industrials group of UBSInvestment Research covering the US automotive sector. He joinedUBS in 2005 as an associate analyst in this sector. Earlier in hiscareer, Mr. Langan was a senior associate at Deloitte & Touche. Heholds an MBA in Finance from Columbia Business School and a BS inAccounting from the University of Notre Dame. Mr. Langan is a CFAcharterholder and a certified public accountant.18
Risk StatementThe global auto industry is highly cyclical, vulnerable to sudden shifts in consumer sentiment, employment, interest rates, andgeneral economic activity. Auto companies have high fixed costs, and therefore earnings and cash flows can dramaticallychange with sudden shifts in vehicle demand. Parts suppliers are further exposed to customer pricing pressure, shifts in OEMmarket share, volatile production schedules, and unforeseen changes in technology. Through its building efficiency segment, JCIis also exposed to non-residential and residential construction. JCI is also exposed to lead, steel, resin, foam chemicals, copper,and fuel costs. BWA is heavily dependant on the European market, and in particular diesel engines. In addition, BWA’sdrivetrain segment supplies transfer cases for SUVs in the US market. Consequently, the continued shift toward cars from lighttrucks and SUVs will negatively impact this segment. BWA also is exposed to steel and nickel pricing. LEA is exposed tofluctuations in the price of steel, polypropylene, and copper. Both Visteon and Dana mitigated a number of their former risks inbankruptcy and have emerged as much healthier and more streamlined businesses. Given the companies have corrected a largeportion of their former operational and liquidity issues, we view the biggest near-term risks to be similar to those of theirpublicly traded supplier peers – including commodity exposure, OEM pricing pressures, and production schedule shifts. Inaddition to these end market risks as a supplier Meritor is also exposed to customer pricing pressures, commodity price risks(primarily steel), shifting OEM share and volatile OEM production schedules.19
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Required Disclosures (Continued)KEY DEFINITIONS: Forecast Stock Return (FSR) is defined as expected percentage price appreciati
Cadillac Escalade ESV Full-Size SUV Q1 2014 0% Chevrolet Corvette Compact Sports Car Q3 2013 1% Chevrolet Silverado Full-Size Pickup Q2 2013 13% Chevrolet Silverado HD Full-Size Pickup Q1 2014 4% Chevrolet Suburban Full-Size SUV Q1 2014 2% Chevrolet Tahoe Full-Size SUV Q1 2014 3% GMC Sierra
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