Tag: Ford Motor Company (F)

Auto Industry Turmoil Causes Interest in 3 Top Stocks Over GM, Ford, and Stellantis

Posted on by The INO.com Team

 

The automotive industry has been navigating a tumultuous period, surrounded by a still high inflation and rising interest rates. Although a resurgence in electric vehicle demand has provided a fleeting respite, residual tension is palpable due to potential strikes led by the United Auto Workers (UAW) union at Stellantis (STLA), Ford Motor Company (F), and General Motors (GM).

The UAW, representing 46,000 GM workers, 57,000 Ford employees, and 43,000 STLA workers, initiated negotiations with the auto giants in July. Historically, the UAW would choose one from these Detroit Three to lead the talks, using it as a blueprint for the remaining deals. However, this time, union President Shawn Fain has opted to negotiate with all three simultaneously after reporting no significant progress with Ford and GM.

About 25,000 UAW members associated with the Detroit Three, representing about 17% of the total membership, are striking at 43 facilities across 21 states. In Michigan alone, two automotive plants – each owned by GM and Ford – and 13 parts distribution centers are impacted, affecting over 9,000 UAW members.

A pivotal demand for the UAW is the elimination of the two-tier wage system, which sees new hires earning significantly less than the veterans. The union is expected to advocate for the reinstatement of pay raises tied to living costs and retirement benefits reduced during the 2008-2009 financial crisis.

Armed with the awareness of automakers' recent financial success and considering substantial executive compensation and sizeable federal subsidies for EV sales, the UAW is pressing for notable salary increases. It also demands the restoration of defined benefit pensions for all workers, reducing the work week to 32 hours, ensuring job security, and ending the use of temporary workers.

Despite challenging negotiations, STLA has proffered a significant offer to the union. Further, talks with Ford are advancing, outlining agreeable terms on wages and benefits.

Impacts of the Strike

On the Detroit Three

As the UAW strike enters its third week, broadening its scope to encompass Ford and GM, an ominous cloud looms over the U.S. automobile industry. Industry experts have expressed concerns, cautioning that these actions could potentially fast-track these corporations toward bankruptcy.

According to prior estimates by Deutsche Bank, a comprehensive strike impacting all car manufacturers could result in losses between $400 million to $500 million per week, assuming all production is stalled. While some losses may be offset with increased production rates once the strike concludes, this option becomes less likely if the labor dispute prolongs for weeks or months.

In fiscal 2019, GM's fourth-quarter earnings suffered significantly due to the 40-day UAW strike, with profits plunging by $3.6 billion. Morgan Stanley analyst Adam Jonas assessed that one month of total production loss could equal between $7 billion and $8 billion in forfeited profits across all three auto giants.

While the ongoing strike has largely impacted Detroit automakers, its effect on GM’s third-quarter new vehicle sales in the U.S. was limited. GM reported a promising 21.4% surge in sales from July through September, outpacing industry anticipations of a 15% to 16% increase. Sales across all of GM’s brands experienced a year-over-year growth.

However, STLA witnessed a 1.3% downfall in sales during the third quarter, an outcome more likely linked to its pricing strategy than the UAW labor dispute.

Although the impact of work stoppages has not yet affected GM and other firms, potential supply chain disruptions and sales complications may arise if the strike extends or amplifies. The dispute's ramifications could grow significantly in October, particularly concerning specific models such as the Chevrolet Colorado and GMC Canyon midsize pickups that have already witnessed production reduction.

The prevailing strike could taint the reputation of the auto behemoths, leading to customer dissatisfaction due to potential delays, cancellations, or quality issues resulting from the strike.

Furthermore, strike-induced increased production costs could dampen profits for these car manufacturers, forcing them to offer higher wages and benefits to UAW employees. This could adversely affect their financial standing, limiting their capacity to invest in new technologies, products, and markets.

Job Loss

The economic impact so far has been relatively subdued compared to preliminary expectations before the UAW's unexpected strategy of targeting specific plants. It is essential to recognize the increasing job losses, coupled with layoffs in ancillary automotive suppliers, which are expected to intensify in the upcoming days.

F’s additional 330 layoffs at the Chicago stamping plant and the Lima engine plant amid the ongoing strike brought the laid-off workers to 930.

According to predictions by the University of Michigan economist Don Grimes, Michigan is projected to see up to 18,495 job cuts by the end of the week, including layoffs in auto suppliers, and are a direct consequence of the escalating strike tactics deployed by the UAW. Nationwide, potential job losses are predicted to reach up to 65,640 this week.

However, these job losses could have been significantly higher if the UAW had followed the conventional approach of targeting all operations of a single automaker when contract negotiations reached an impasse.

On the Economy

As per the University of Michigan economist Don Grimes, the UAW strike timing is especially troublesome for economic growth overall, given that October typically heralds the beginning of student loan repayments following a pause that had lasted for over three years, shrinking consumer savings due to depleted emergency funds accumulated during the pandemic and the rising interest rates that are expected to beset overall growth.

Moody's economist, Mark Zandi, said, "If the UAW strike lasts through the end of October as we anticipate, it will reduce annualized real GDP growth in the fourth quarter by another estimated 0.3 percentage point."

This estimate considers the direct impact of stalled car and parts manufacturing potential downstream effects on suppliers and auto dealers, coupled with decreased spending due to wage losses incurred by workers participating in the strike. With the collective weight of these adverse factors, the U.S. economy could head into a challenging fourth quarter.

On Competitors

As the strike impacts the Detroit Three, industry players Toyota Motor Corporation (TM), Mercedes-Benz Group AG (MBGAF), and AB Volvo (publ) (VLVLY) could significantly benefit from the chaos.

These automotive titans, having unions such as Germany's IG Metall, Sweden's IF Metall and Unionen, and Japan's Toyota Motor Workers’ Union, have a limited presence in UAW.

Such companies stand to service customers seeking alternatives to products from the Detroit Three. By continuing to deliver reliable and high-quality vehicles, its strong suit being luxury sedans, SUVs, and EVs, these automakers could further enhance their reputations and customer loyalty.

Additionally, these corporations could utilize their global footprint and remarkable efficiency to sustain a competitive edge and maintain a leadership position in innovation.

Auto industry powerhouses TM, MBGAF, and VLVLY have also invested substantially in pioneering technologies such as electrification, autonomous driving, and connectivity.

Contemplating the advantage these three car manufacturers currently hold over the Detroit Three amid unresolved worker strikes, it seems prudent to examine the other elements making their stocks an attractive investment endeavor now:

Toyota Motor Corporation (TM)

Based in Toyota, Japan, TM, with a market cap of over $229 billion, manufactures and sells passenger, minivans, commercial vehicles, and related parts and accessories globally.

It pays an annual dividend of $4.99 per share, translating to a dividend yield of 2.55%. Its four-year average yield is 2.81%. Its dividend payouts grew at a CAGR of 1.6% over the past three years and 1.3% over the past five years.

TM’s trailing-12-month EBIT and EBITDA of 8.33% and 12.62% are 13.2% and 14.3% higher than the industry averages of 7.36% and 11.04%, respectively. Its trailing-12-month cash from operations of $24.60 billion is significantly higher than the industry average of $223.80 million.

In terms of forward P/E, TM is trading at 9.12x, 36.1% lower than the industry average of 14.28x. Its forward Price/Cash Flow multiple of 5.28 is 26.7% lower than the industry average of 7.95.

TM’s global sales report for August 2023 notched an impressive 9% year-over-year growth to 923,180 vehicles. The automotive giant increased its production by 4.3%, manufacturing an impressive 924,509 vehicles within the month. Fueling the company's solid performance was a favorable surge in domestic demand coupled with a robust recovery of the semiconductor supply chain.

TM’s sales revenues increased 24.2% year-over-year to ¥10.55 trillion ($70.75 billion) for the fiscal first quarter that ended June 30, 2023. Its operating income increased 93.7% year-over-year to ¥1.12 trillion ($7.52 billion). Net income attributable to TM increased 78% year-over-year to ¥1.31 trillion ($8.80 billion), while earnings per share attributable to TM stood at ¥96.74, up 80.6% from the year-ago quarter.

According to a Nikkei report, TM has told its suppliers that it plans to make 150,000 EVs this year, 190,000 in 2024, and 600,000 in 2025.

Analysts expect TM’s revenue and EPS for the fiscal year (ending March 2023) to increase 3.2% and 597.3% year-over-year to $285.31 billion and $18.60, respectively. Also, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

Over the past year, the stock gained more than 21%. The stock is trading above the 100-day and 200-day moving averages of $163.50 and $151.44, indicating an uptrend. Wall Street analysts expect the stock to reach $207.79 in the next 12 months, indicating a potential upside of 22.6%.

Mercedes-Benz Group AG (MBGAF)

MBGAF, a German car maker with a market cap of over $74 billion, develops, manufactures, and sells premium and luxury cars and vans under the Mercedes-AMG, Mercedes-Benz, Mercedes-Maybach, and Mercedes-EQ brands, as well as related spare parts and accessories.

In a significant development, the company recently signed an agreement with Steel Dynamics Inc. (SDI) to procure over 50,000 tons of carbon-reduced steel annually for its Tuscaloosa, Alabama facility. This transaction signifies an essential step forward in the company's ongoing initiative to decarbonize its worldwide steel supply chain, which is anticipated to enhance its corporate sustainability profile significantly.

It pays an annual dividend of $5.72 per share, translating to a dividend yield of 8.36%. Its four-year average yield is 5.02%. Its dividend payouts grew at a CAGR of 24.2% over the past three years and 14.8% over the past five years.

MBGAF’s trailing-12-month ROCE and ROTA of 18.69% and 5.95% are 64.1% and 54.7% higher than the industry averages of 11.39% and 3.85%, respectively. Its trailing-12-month cash from operations of $17.76 billion is significantly higher than the industry average of $223.80 million.

In terms of forward non-GAAP P/E, MBGAF is trading at 4.74x, 66.2% lower than the industry average of 14.02x. Its forward EV/Sales multiple of 1.03 is 9.2% lower than the industry average of 1.13.

MBGAF’s revenues for the fiscal second quarter that ended June 30, 2023, increased 4.9% year-over-year to €38.24 billion ($40.12 billion). Its adjusted EBIT rose 5.5% from the year-ago quarter to €5.21 billion ($5.47 billion). The company’s net profit and earnings per share rose 13.9% and 14.8% year-over-year to €3.64 billion ($3.82 billion) and €3.34.

Analysts expect MBGAF’s revenue for the fiscal year (ending December 2023) to increase 2% year-over-year to $163.68 billion, and EPS is expected to come at $14.21. Also, the company topped the consensus revenue estimates in three of the trailing four quarters.

Over the past year, the stock gained more than 24%. Wall Street analysts expect the stock to reach $92.40 in the next 12 months, indicating a potential upside of 34.9%. The price target ranges from a low of $73.28 to a high of $125.62.

AB Volvo (publ) (VLVLY)

VLVLY, a Swedish carmaker with over $42 billion market cap, manufactures and sells trucks, buses, and related heavy industrial equipment globally.

Recently, Volvo Defense, a business operation within Volvo Trucks, has entered a framework agreement with the Estonian Centre for Defense Investments and the Ministry of Defense of the Republic of Latvia to deliver logistic trucks. Volvo was chosen as one of two suppliers that combined will deliver up to 3,000 vehicles over seven years. This should bode well for the company.

VLVLY pays an annual dividend of $0.68 per share, translating to a dividend yield of 3.35%. Its four-year average yield is 7.27%. Its dividend payouts grew at a CAGR of 6.1% over the past five years.

VLVLY’s trailing-12-month ROCE, ROTC, and ROTA of 24.77%, 9.43%, and 5.74% are 82.3%, 38.9%, and 13.8% higher than the industry averages of 13.59%, 6.79%, and 5.04%, respectively.

In terms of forward non-GAAP P/E, VLVLY is trading at 8.10x, 52.2% lower than the industry average of 16.94x. Its forward EV/Sales multiple of 1.20 is 26.6% lower than the industry average of 1.64.

During the fiscal second quarter of 2023, VLVLY’s net sales increased 18.4% year-over-year to SEK140.82 billion ($12.71 billion). Its gross income rose 35.5% year-over-year to SEK38.92 billion ($3.51 billion). Its adjusted operating income grew 58.1% from the year-ago quarter to SEK21.73 billion ($1.96 billion).

Furthermore, the company’s income for the quarter grew 2.8% year-over-year to SEK10.82 billion ($976.92 million), and its EPS was SEK5.30, an increase of 3.1% over the previous year’s quarter. Also, its operating cash flow from industrial operations rose 74.4% year-over-year to SEK12.55 billion ($1.13 billion).

Analysts expect VLVLY’s revenue and EPS for the fiscal year (ending December 2023) to increase 3.1% and 44.1% year-over-year to $47.57 billion and $2.49, respectively. Also, the company topped the consensus revenue estimates in three of the trailing four quarters, which is impressive.

Over the past year, the stock gained more than 32% and currently trades above the 200-day moving average of $19.75. Wall Street analysts expect the stock to reach $22.51 in the next 12 months, indicating a potential upside of 11.4%. The price target ranges from a low of $19.25 to a high of $25.58.

Bottom Line

The auto industry in the U.S. represents approximately 4% of the nation's GDP. Therefore, increasing momentum within the industry could propel a more comprehensive economic revival.

Despite obstacles, the auto industry exhibited impressive resilience, maintaining operations, meeting consumer demands, and strategically seeking growth opportunities. The embodiment of this stability is evidenced in the surge of new vehicle sales in August, registering double-digit percentage increases compared to a year ago. Global auto sales for 2023 are anticipated to reach 86.8 million units, surpassing the previous estimate of 86.4 million units.

Considering the overall scenario, the robust financial performances of TM, MBGAF, and VLVLY, combined with their compelling valuation metrics, consistent profitability, dynamic advancements, strategic partnerships, and optimistic analyst estimates, make the stocks more favorable portfolio additions than the Detroit Three, which are currently grappling with the fallout from labor strikes.

Are General Motors (GM), Ford Motor (F), and Stellantis (STLA) Investors Facing a Troubled September?

Posted on by The INO.com Team

The automobile industry navigated a tumultuous period featured by the pandemic-induced supply chain hiccups, soaring inflation, and climbing interest rates. However, the situation is improving lately thanks to the surge in EV demand.

According to Cox Automotive, during the first half of 2023, new vehicle sales in the U.S. surged 12.3% year-over-year, taking total sales to 7.69 million units, exceeding the estimated projections of 7.65 million.

However, this respite in the auto industry could be short-lived due to looming tensions wrought by potential strikes threatened by the United Auto Workers (UAW) union at Stellantis (STLA), Ford Motor Company (F), and General Motors (GM), should contractual negotiations not reach a successful conclusion by September 14, 2023.

In a recent authorization vote surrounding the possibility of walk-outs at these major plants, referred to as the ‘Big Three,’ employing 150,000 UAW-unionized workers, an overwhelming 97% of UAW members voiced their support.

UAW has outlined several ambitious targets. There will be a determined attempt to reinstate specific contractual provisions relinquished during the 2007 negotiations, including retiree health insurance and the abolition of a conventional pension scheme.

Since 2010, the number of U.S. automobile manufacturing jobs has risen. However, exponential advancements in EVs, increasingly supported by the government, could result in mass staff layoffs.

The main apprehensions of American autoworkers are twofold. First, the predicted transition to EV production could usher in layoffs and factory closures. Second, because many battery production companies are joint ventures, these entities might not pledge primary allegiance to union demands.

Adding to the frustration, workers have expressed discontent over profit distribution, claiming that corporate executives pocket vast returns, leaving little for the rank-and-file.

Substantiating this fear is that each of the three auto manufacturers has scaled down their employment figures over the past year. In June, Ford undertook a series of layoffs impacting nearly 1,000 workers across its gas-powered, EV production, and software development sectors. While it rationalizes the reductions as realignments based on ‘skills and expertise,’ hiring was reported only in ‘key area.’

Similarly, GM shut down an IT center in Arizona in October last year and initiated layoffs impacting about 940 workers. Moreover, the company acknowledged that over 5,000 salaried employees had opted for buyout offers as part of a broader cost-saving execution amid economic recession fears.

Furthermore, STLA, following a similar suit, offered buyouts to over 33,000 employees in April to avert layoffs that have befallen other automakers.

Amid these events, the union has vocalized its intent to secure protection against employment terminations and plant closures.

Potential Impact of the Strike

Halting production for even one big automaker during a strike could have acute ramifications, directly harming thousands of workers, and the companies could face significant financial losses due to diminished sales and stalled production.

F employs the highest number of UAWs, approximately 57,000 across all its U.S. manufacturing units, while its counterparts GM and STLA have 46,000 and 44,000 UAW members, respectively.

The UAW has amassed over $825 million in its strike fund to provide employees on strike with a weekly allowance of $500, projected to be exhausted within 11 weeks. Strikers would lose out on wages that would only be partially offset by the union’s weekly benefit.

During strikes, the financial implications for auto companies can be catastrophic. The 2019 40-day strike reportedly cost GM a staggering $3.6 billion. A prolonged strike may also threaten the UAW’s efforts to restore its reputation after several corruption allegations.

The fallout from a strike on the 'Big Three' automakers could result in production delays or potential shutdowns, influencing their overall revenues. Meanwhile, there has been news of F preparing its salaried and white-collar workforce to step into production roles should the UAW members initiate a strike.

Negotiations ensuing these situations could add over $80 billion in labor costs to each automaker over the contract period and increase the likelihood of work stoppages.

The Anderson Economic Group forecasts that potential work stoppages could inflict an economic loss exceeding $5 billion within 10 days. Similarly, Deutsche Bank hypothesizes that each automaker could endure earnings losses ranging between $400 million and $500 million for each week of halted production.

It could jeopardize production schedules within the Big Three's auto manufacturing realm. If the production losses escalate rapidly, it might lead to approximately 1.5 million units forfeiting. However, these aggressive tactics primarily favor the interests of the UAW rather than the companies or their shareholders.

If the demands are fulfilled without any revisions to other benefits, the hourly labor cost for automakers will more than double, representing a significant increase compared to the rates settled in the preceding four-year agreements.

Considering the current scenario, let us understand where the ‘Big Three’ automakers stand.

Stellantis N.V. (STLA)

Headquartered in Hoofddorp, the Netherlands, STLA reported a record-breaking earnings report for the six months ended June 30, 2023. Its net revenues increased 11.8% year-over-year to €98.37 billion ($104.52 billion), while adjusted operating income grew 11% from the year-ago value to €14.13 billion ($15.32 billion). The company’s net profit rose 37.2% year-over-year to €10.92 billion ($11.84 billion).

Following these impressive financial results, STLA projects that its adjusted operating income margin will reach double digits and maintain a positive industrial free cash flow for the 2023 fiscal year.

On August 24, it announced the expansion of its SPOTiCAR program to the U.S. This initiative aims to streamline vehicle purchases for individuals and businesses through digital tools and specialized dealerships, thereby increasing customer satisfaction and future product value.

On August 23, the company completed an agreement with AGI, a leader in nationwide branded infrastructure programs for more than 50 years, to support national U.S. dealership electrification and EV charging capabilities. These moves are expected to help STLA fulfill its Dare Forward 2030 strategy to achieve 50% battery-EV sales by the end of this decade. This strategic partnership with AGI will significantly augment STLA's revenue generation capacity.

As a result of such developments, Analysts expect STLA’s revenue and EPS in the fiscal year (ending December 2023) to be $205.16 billion and $5.70, registering growths of 7.8% and 3.2% year-over-year, respectively. Moreover, the company surpassed the consensus revenue estimates in all the trailing four quarters.

Shares of STLA have gained 28.9% year-to-date and lost 10.9% over the past month to close the last trading session at $18.30.

Institutional investors and hedge funds have recently changed their STLA stock holdings. Institutions hold roughly 29.3% of STLA shares. Of the 433 institutional holders, 200 have increased their positions in the stock. Moreover, 60 institutions have taken new positions (7,111,951 shares), while 42 have sold positions in the stock (30,938,367 shares).

Ford Motor Company (F)

Legacy automaker F posted better-than-expected second-quarter earnings and raised their respective 2023 projections.

During the second quarter, F’s revenues rose 11.9% year-over-year to $44.95 billion, and automotive revenues peaked at $42.43 billion, surpassing the $40.38 billion estimate. The net income almost tripled to $1.92 billion, marking an 187.4% year-over-year increase.

The automaker raised its full-year adjusted EBIT guidance range from $9 billion and $11 billion to $11 billion and $12 billion while simultaneously raising its adjusted free cash flow guidance from $6 billion to $6.5 billion and $7 billion. The company anticipates to hit an 8% EBIT target by 2026.

In August, SK On, EcoProBM, and F announced a C$1.2 billion investment to construct a cathode manufacturing facility that will provide materials to supply batteries to solidify the EV supply chain in North America. With production anticipated to commence by the first half of 2026, the facility is expected to produce up to 45,000 tonnes of CAM annually. Being F's inaugural investment in Québec, this new facility aligns with the company's goal of localizing vital battery raw material processing in regions where EV manufacturing occurs.

On August 1, F reopened its Rouge Electric Vehicle Center after a six-week expansion project, increasing its capacity to 150,000 units by the fall to meet the heavy demand. Nevertheless, a strike projected for September threatens to curtail the benefits of this additional capacity, given the likely slowdown in production.

Investor apprehension was fueled by multiple facets of the company's earnings and guidance. Notably, the EV segment of the business, recently rebranded as Model E, reported a pre-tax loss of $1.08 billion. The firm anticipates losses for this segment could mount to $4.5 billion in 2023, a startling increase of 50% compared to previous estimates.

Amid a global price war, F reduced prices for its 2023 Motor Trend Car of the Year F-150 Lightning Electric Truck, directly responding to price cuts implemented by rival Tesla. Consequently, this strategy spurred a six-fold demand surge in orders and over 50% for its XLT trim level. The price cuts are anticipated to dent the profitability of industry players.

Additionally, the company has publicly acknowledged the slow pace of EV adoption and consequently has dialed back its ambitious EV production plans. The company now expects to hit an annual production capacity of 600,000 vehicles by 2024 instead of 2023 while being “flexible” about the goal of 2 million vehicles it previously forecast by 2026.

Analysts expect F’s revenue and EPS in the fiscal year (ending December 2023) to be $166.11 billion and $2.07, registering 11.5% and 10.2% year-over-year growths, respectively. Moreover, the company surpassed the consensus revenue estimates in three of the trailing four quarters.

Considering these developments, F’s shares have been facing pressures, sending its stock down to May 2023 levels. Over the past year, the stock declined 22.8% and 10.3% over the past month to close the last trading session at $11.90.

Institutions hold roughly 54.7% of F shares. Of the 1,798 institutional holders, 773 have decreased their positions in the stock. Moreover, 131 institutions have taken new positions (12,514,405 shares), while 135 have sold positions in the stock (18,347,658 shares).

General Motors (GM)

Detroit’s auto giant, GM, reported impressive revenue and profit growth, upgrading its profit prediction for the second time this year. Despite global challenges, the company continues to see robust demand for its vehicles and reduced expenditure.

For the fiscal second quarter that ended June 30, 2023, GM’s total revenues grew 25.1% year-over-year to $44.75 billion, while its adjusted EBIT rose 38% year-over-year to $3.23 billion. Its net income attributable to stockholders rose 51.7% year-over-year to $2.57 billion, while its adjusted EPS came in at $1.91, representing a 67.5% increase year-over-year. GM’s adjusted automotive free cash flow amplified 294.3% year-over-year to $5.55 billion.

The company has revised its net income expectations for the ongoing fiscal year from an earlier high-end estimate of $9.3 billion to $10.7 billion. Its automotive division’s free cash flow is also expected to come between $7 billion and $9 billion, up from $5.5 billion to $7.5 billion.

This impressive financial performance, fueled by a thriving conventional auto business spotlighting profitable trucks and SUVs, has facilitated the company's intensified entry into the electric vehicle (EV) sector. GM said it would increase cost-cutting measures through next year by an additional $1 billion in expenditures.

Investors can look forward to significant potential gains if the company successfully leverages new business opportunities and smoothly transitions from reliance on internal combustion engine sales to EVs.

By aligning focus on the promising sectors of electric and autonomous vehicles, connected services, and new business models, GM anticipates being able to double company revenue by the decade’s end. Additionally, it envisages its EV wing reaching profitability by 2025, boasting an EV production capacity of 1 million units in North America and approximately $50 billion in EV-generated revenue.

GM's endeavors to explore fresh avenues of income are highlighted by its autonomous robotaxi unit, Cruise. The company recently declared the commencement of production for numerous EVs based on the freshly conceptualized Ultium platform from 2023’s second half. Initiated in 2018, the Ultium EV platform is versatile enough to produce various vehicle sizes and types across segments. The wide range of the platform will help streamline production and improve its supply chain, helping push toward more profitable EVs.

However, GM has struggled to ramp up production of its EVs this year, citing problems with battery module availability. GM said it is resolving that issue, and EV production is expected to improve in the second half of 2023.

Analysts expect GM’s revenue and EPS in the fiscal year (ending December 2023) to be $171.71 billion and $7.73, registering 9.6% and 1.9% year-over-year growth, respectively. Moreover, the company surpassed the consensus EPS estimates in all the trailing four quarters.

Institutional investors have recently changed their holdings of GM stock. Institutions hold roughly 82% of GM shares. Of the 1,346 institutional holders, 575 have decreased their positions in the stock. Moreover, 110 institutions have taken new positions (6,710,244 shares), while 95 have sold positions in the stock (7,158,230 shares).

Warren Buffett’s Berkshire Hathaway recently announced a significant reduction in its stake in GM during the second quarter by 45%, from about 40 million to about 22 million. The decision could be related to the challenging contract negotiations.

Considering these developments, GM’s shares have been facing pressure. Over the past year, the stock declined 15.6% and 13% over the past month to close the last trading session at $33.12.

Observations

GM and F might face over 10% decline in their earnings, should a prolonged strike occur. However, STLA is less susceptible to this risk due to its primary business concentration in Europe, regions lacking a UAW union presence.

American Axle, for instance, gets an estimated 55% to 65% of its revenue from operations dependent on UAW workers, while Magna International gets 35% to 40%, and Lear gets 30% to 35%.

The repercussions of the UAW contract could resonate nationally, affecting the steel industry and smaller US manufacturers that supply parts to the Detroit Three automakers.

Furthermore, the replacement rates, indicating the percentage of product portfolio to be swapped with brand-new products in the next four years, carry significant implications. It impacts the age of products displayed in showrooms, the market share companies can capture, and their corresponding profitability.

John Murphy, the Lead U.S. Auto Analyst at Bank of America’s Equity Research, highlighted that companies with lower replacement rates indicate a less fresh product and are expected to lose more market share. Conversely, businesses with higher replacement rates tend to gain more market share.

According to the Car Wars study, the anticipated vehicle replacement rate between 2024 and 2027 is expected to align with the historical average of 15%. In this respect, F appears optimally positioned, while STLA lags. GM, on the other hand, “marginally” lags the industry’s average replacement rate.

GM's replacement rate is forecasted to land close to the industry average of 22.8%. F's forecasted replacement rate is the highest in the industry, at 24.8%, while STLA’s is at the bottom of the list with a forecasted replacement rate of 15.9%.

Bottom Line

The auto industry in the U.S. constitutes approximately 4% of the nation's Gross Domestic Product (GDP). Underpinning this, an upward trend in the industry is anticipated to generate a broader economic resurgence.

The strike is anticipated to impact the three big automakers, their shareholders, the associated industries, and the overall auto market. However, what looms on the horizon involves more than simply elevating individual living standards. A contemplative eye must be cast toward the imminent influence of technology on prospective employment within the sector.

As Peter Berg, Professor of Employment Relations at Michigan State University, posited, the gradual transition from combustion engines to battery-operated electric vehicles will inevitably reconfigure manufacturing, requiring a fewer workforce possessing divergent skill sets.

Notably, the potential strike could exert a greater impact on automakers' operations and financial outcomes than one that occurred four years ago. This amplified threat is primarily attributable to the ongoing recovery of the U.S. auto industry from supply chain disruptions caused by the pandemic and lower vehicle inventory levels. Such elements make it imperative for negotiators to swiftly broker a satisfactory compromise to mitigate costly fiscal repercussions for all stakeholders involved.

4 Stocks Set to Gain From Nissan Motor’s (NSANY) Shady Business

Posted on by The INO.com Team

Last week, the Nissan Motor Co., Ltd. (NSANY) dealership in North Carolina found itself mired in controversy as more than 400 charges were filed against twelve of its current and former employees. North Carolina’s Department of Transportation (DOT) filed the charges against the Nissan of Shelby dealership employees.

The charges include failing to disclose damage, improperly rebuilding salvage titles, failure to inspect vehicles prior to being offered for sale, failure to deliver title, improper use of temporary markers, making false statements about the date of sale, and more.

The agency stumbled upon these misdeeds while looking into the process used by the dealership to rebuild the titles of salvage vehicles. The dealership’s former general manager Sam Kazran was caught with 110 counts of Failure to Inspect Vehicle Prior to Being Offered for Sale.

Another employee, Casey Ramsey, was charged with 38 counts of Failure to Deliver Title, 38 counts of Improper Use of Temporary Markers, four counts of Failure to Disclose Damage, and one count of Making False Statement about the Date of Sale. The other ten employees were charged with a combination of the abovementioned violations.

These charges come after a WBTV investigation earlier this year revealed that Nissan of Shelby had listed totaled cars and flooded vehicles for sale and were sold to unsuspecting customers. WBTV found nearly a dozen cars the dealership either bought or sold at insurance salvage auctions, with many of them ending up for sale on their website.

NSANY’s stock has declined more than 12% over the past month.

NSANY’s association with this controversial dealership would definitely alarm buyers. In this scenario, its peers Stellantis N.V. (STLA), Honda Motor Co., Ltd. (HMC), Ford Motor Company (F), and NIO Inc. (NIO) stand to benefit.

Let’s delve into the fundamentals of these stocks to understand their near-term prospects.

Stellantis N.V. (STLA)

Headquartered in Hoofddorp, the Netherlands, STLA designs, manufactures, distributes, and sells automobiles and light commercial vehicles, engines, transmission systems, metallurgical products, mobility services, and production systems worldwide. It offers its products under the Abarth, Alfa Romeo, Chrysler, DS, Dodge, Jeep, Fiat, Maserati, Ram, Opel, Lancia, Vauxhall, Peugeot, Comau, and Teksid brands.

On July 24, 2023, STLA and Samsung SDI announced that they had signed an MOU to establish a second battery plant in the U.S. under the existing StarPlus Energy joint venture, targeting to start production in 2027 with an annual production capacity of 34 GWh. This supports Stellantis' aim to offer 25 new electric vehicles in North America by the decade's end and move towards carbon neutrality by 2038.

On July 6, 2023, STLA and NioCorp Developments Ltd. announced the signing a Rare Earth Offtake Term Sheet. The Term Sheet envisions a definitive agreement for a 10-year offtake contract for specific amounts of neodymium-praseodymium oxide, dysprosium oxide, and terbium oxide that NioCorp aims to produce at its Elk Creek Critical Minerals Project in southeast Nebraska.

The supply agreement will support STLA’s efforts to build reliable supply chains and achieve its sustainability goals.

In terms of the trailing-12-month EBIT margin, STLA’s 12.46% is 70.1% higher than the 7.33% industry average. Likewise, its 10.40% trailing-12-month net income margin is 149% higher than the 4.18% industry average. Likewise, its 27.85% trailing-12-month Return on Common Equity is 157.4% higher than the 10.82% industry average.

In terms of forward non-GAAP P/E, STLA’s 3.18x is 78.4% lower than the 14.73x industry average. Its 0.27x forward Price/Sales is 68.3% lower than the 0.86x industry average. Likewise, its 0.61x forward Price/Book is 75.4% lower than the 2.48x industry average.

STLA’s net revenues for the six months ended June 30, 2023, increased 11.8% year-over-year to €98.37 billion ($107.02 billion). Its net profit increased 37.2% year-over-year to €10.92 billion ($11.88 billion). Its adjusted operating income rose 11% year-over-year to €14.13 billion ($15.37 billion). The company’s EPS came in at €3.45, representing an increase of 39.7% year-over-year.

Analysts expect STLA’s revenue for the fiscal period ending September 30, 2023, to increase 19.2% year-over-year to $48.94 billion. Its EPS for fiscal 2023 is expected to increase 3.2% year-over-year to $5.70.

Honda Motor Co., Ltd. (HMC)

Headquartered in Tokyo, Japan, HMC develops, manufactures, and distributes motorcycles, automobiles, power products, and other products in Japan, North America, Europe, Asia, and internationally. It operates through four segments: Motorcycle Business; Automobile Business; Financial Services Business; and Life Creation and Other Businesses.

On February 28, 2023, HMC and LG Energy Solution held the groundbreaking ceremony for their joint venture EV battery plant spread over 2 million square feet. The facility is scheduled to be completed by the end of 2024, aiming for an annual production capacity of 40 GWh. The JV company will deliver lithium-ion batteries to support HMC’s plan to build battery-electric vehicles (BEV) in North America.

In terms of the trailing-12-month EBITDA margin, HMC’s 13.12% is 21.8% higher than the 10.77% industry average. Likewise, its 4.89% trailing-12-month net income margin is 17% higher than the 4.18% industry average.

On the other hand, its 7.46% trailing-12-month Return on Common Equity is 31.1% lower than the 10.82% industry average. Its 5.38% trailing-12-month EBIT margin is 26.5% lower than the 7.33% industry average.

In terms of forward EV/Sales, HMC’s 0.62x is 46.3% lower than the 1.16x industry average. Its 0.38x forward Price/Sales is 55.9% lower than the 0.86x industry average. Likewise, its 9.97x forward EV/EBIT is 26.4% lower than the 13.55x industry average.

For the first quarter that ended June 30, 2023, HMC’s sales revenue increased 20.8% year-over-year to ¥4.62 trillion ($31.67 billion). The company’s operating profit increased 77.5% year-over-year to ¥394.45 billion ($2.70 billion). Its profit for the period increased 134.1% year-over-year to ¥382.95 billion ($2.62 billion). In addition, its EPS came in at ¥219.06, representing an increase of 151.1% year-over-year.

For the quarter ending September 30, 2023, HMC’s revenue is expected to increase 17.4% year-over-year to $34.09 billion. Its EPS for the fiscal year 2024 is expected to increase 19.2% year-over-year to $3.77.

Ford Motor Company (F)

F develops, delivers, and services a range of Ford trucks, commercial cars and vans, sport utility vehicles, and Lincoln luxury vehicles worldwide. It operates through Ford Blue, Ford Model e, and Ford Pro; Ford Next; and Ford Credit segments.

On August 17, 2023, SK On, EcoProBM, and F announced an investment of C$1.2 billion to build a cathode manufacturing facility that will provide materials that ultimately supply batteries to F’s future electric vehicles. The facility will help the automaker localize critical battery raw material processing in regions where it produces its EVs. Production is slated to begin in the first half of 2026.

F’s 2.44% trailing-12-month net income margin is 41.7% lower than the 4.18% industry average. Likewise, its 8.16% trailing-12-month EBITDA margin is 24.2% lower than the 10.77% industry average. Furthermore, the stock’s 10.34% trailing-12-month gross profit margin is 70.8% lower than the industry average of 35.41%.

On the other hand, the stock’s 4.43% trailing-12-month Capex/Sales is 37.8% higher than the industry average of 3.22%.

In terms of forward non-GAAP P/E, F’s 5.73x is 61.1% lower than the 14.73x industry average. Its 0.29x forward Price/Sales is 66.6% lower than the 0.86x industry average. Likewise, its 1.03x forward Price/Book is 58.4% lower than the 2.48x industry average.

On the other hand, in terms of forward EV/EBITDA, F’s 10.46x is 9.2% higher than the 9.58x industry average. Likewise, its 14.12x forward EV/EBIT is 4.2% higher than the 13.55x industry average.

F’s total revenues for the second quarter ended June 30, 2023, rose 11.9% year-over-year to $44.95 billion. Its adjusted EBIT increased 1.7% year-over-year to $3.79 billion. The company’s adjusted net income increased 6.5% over the prior-year quarter to $2.93 billion. Its EPS came in at $0.72, representing an increase of 5.9% year-over-year.

Street expects F’s EPS and revenue for the quarter ending September 30, 2023, to increase 50.3% and 10.3% year-over-year to $0.45 and $41.01 billion, respectively. The stock has gained 7.2% year-to-date to close the last trading session at $11.87.

NIO Inc. (NIO)

Headquartered in Shanghai, China, NIO designs, develops, manufactures, and sells smart electric vehicles. It offers five and six-seater electric SUVs, as well as electric sedans. The company also provides power solutions, including Power Home, Power Swap, Power Charger and Destination Charger, Power Mobile, Power Map, and One Click for Power valet service.

On June 20, 2023, NIO announced that it entered into a share subscription agreement with CYVN Holdings L.L.C. NIO’s founder, chairman, and CEO William Bin Li said, “The strategic investments from CYVN Holdings demonstrate NIO’s unique values in the smart electric vehicle industry.”

“The investment transaction will further strengthen our balance sheet to power our continuous endeavors in accelerating business growth, driving technological innovations, and building long-term competitiveness,” he added.

NIO’s negative 37.01% trailing-12-month EBIT margin compares to the 7.33% industry average. Likewise, its negative 30.74% trailing-12-month EBITDA margin compares to the 10.77% industry average.

On the other hand, the stock’s 13.88% trailing-12-month Capex/Sales is 331.5% higher than the industry average of 3.22%.

In terms of forward EV/Sales, NIO’s 2.17x is 87.1% higher than the 1.16x industry average. Likewise, its 2.18x forward Price/Sales is 154.4% higher than the 0.86x industry average.

For the fiscal first quarter ended March 31, 2023, NIO’s total revenues increased 7.7% year-over-year to RMB10.68 billion ($1.47 billion). Its gross profit declined 88.8% year-over-year to RMB162.29 million ($22.35 million).

Its non-GAAP net loss attributable to ordinary shareholders of NIO widened 222.3% year-over-year to RMB4.14 billion ($570.08 million). Also, its non-GAAP loss per share attributable to ordinary shareholders widened 217.7% year-over-year to RMB2.51.

Analysts expect NIO’s revenue for the quarter ending September 30, 2023, to increase 35% year-over-year to $2.44 billion. 

Insight Into Warren Buffett's Strategy: Unveiling His 40 Million General Motors (GM) Shares and the Investment Implications

Posted on by The INO.com Team

Berkshire Hathaway Inc. (BRK), led by fabled investor Warren Buffett, also fondly known as The Oracle of Omaha, owns 22 million General Motors Company (GM) shares, equating to a 1.6% stake in the legacy U.S. automaker.

A fundamentally robust company such as GM deserves its spot in a conglomerate's portfolio with a reputation for acquiring parts or the entirety of businesses that possess enduring competitive advantages and are likely to be aided by favorable economics in the long run.

On the back of a strong performance in the fiscal 2023 second quarter, the Detroit-headquartered auto giant has raised its guidance for 2023. The company raised its net income expectations for the fiscal from a high end of $9.9 billion to a high end of $10.7 billion. Its automotive division’s free cash flow is also expected to come between $7 billion and $9 billion, up from $5.5 billion to $7.5 billion.

In addition, GM said it is increasing cost-cutting measures through next year and now plans to cut $3 billion in expenditures compared with previous guidance of $2 billion. The financial outperformance driven by the booming traditional automotive business powered by highly profitable trucks and SUVs has enabled the company to ramp up its presence in the electric vehicle (EV) segment.

Consequently, GM reiterated that it would double EV production in the year's second half to 100,000 units. In addition to the long-awaited introduction of an electric Chevrolet Silverado pickup truck and EV versions of Chevy’s Equinox crossover and Blazer compact sport-utility vehicle, the company says it will reach 400,000 cumulative units of EV production by early 2024.

GM also anticipates that its EV business will reach profitability by 2025, with an EV production capacity of 1 million units in North America and EV revenue of roughly $50 billion.

In addition, the company is making itself future-ready by fixing supply-chain issues with measures such as a $60 million investment round in Mitra Chem, a California startup working on cheaper EV batteries. Mitra Chem aims to develop low-cost lithium iron phosphate batteries that can hold more power than current versions. If it’s successful, its batteries could appear in GM’s EVs later this decade.

GM is also developing its Ultium EV platform, which will help reduce costs and improve profitability. In addition, GM is diversifying to more potentially lucrative businesses such as Cruise, its driverless cab service, and BrightDrop, which is focused on helping businesses meet consumer demand for last-mile services.

All the above factors make GM an apparently solid bet in the automotive sector and a far cry from cash-strapped and debt-burdened EV upstarts that are struggling to keep themselves afloat amid increased borrowing cost due to sustained interest-rate hikes and EV price war that has been waged by Tesla, Inc. (TSLA).

The Flip Side

When asked about when to sell stocks, Buffett famously replied, “To break off relationships with people that I like and people that have joined me because they think it’s a permanent home, to do that simply because somebody waves a big check at me would be like selling one of my children.”

So when the legend, whose favorite holding period is forever, decides to cut his stake in GM, a business his company has owned since 2012, by almost half, it can only mean that either BRK is chronically short of funds and has been finding numerous opportunities to put them to better use or the economic characteristics of the business change in a big way.

Since BRK is sitting on a mountain of cash worth at least $147 billion, we can definitely count out the former possibility. As far as the latter is concerned, carmakers in the U.S. and Europe are once again under siege.

However, this time around, the war is on climate change, the goal is rapid decarbonization and energy transition, the battleground is smart, connected, and electric mobility solutions, and the invaders are from the other side of the Pacific, beyond the Sea of Japan.

Recently, after BYD Company Limited (BYDDY) delivered its five millionth electric vehicle, its founder Wang Chuanfu declared the “time has come for Chinese brands.” And he has good reason to be optimistic. Chinese automakers have access to its vast domestic market, abundant supplies of resources, such as rare earths, which are critical for energy transition, and a government keen on seeing its domestic brands compete globally.

China’s dominance in rare earth and other clean energy metals is back in the limelight after the recent export restriction on germanium and gallium. With the trade war between the U.S. and China intensifying amid restrictions on exports of semiconductor chips and investments in other cutting-edge technology by the former, the latter is expected to keep upping the ante.

This could hurt the prospects of Western car manufacturers as they might be compelled to deal with increased input costs on top of exchange-rate headwinds and credit crunch due to the Federal Reserve ratcheting up the benchmark borrowing cost to 5.25%-5.50% from nearly 0% in the space of 16 months. 

While carbon border tax and other protective measures could provide temporary shelter for besieged Western automakers, the beneficiaries stand to lose more if the Chinese government cuts off their access to the massive domestic market on which the Chinese automakers could always fall back upon encountering turbulence overseas.

Moreover, with Vietnamese EV-maker VinFast Auto Ltd. (VFS) surpassing the market capitalization of heavyweights, such as Ford Motor Company (F) and GM, in the words of VW chief Thomas Schaefer, “The roof is on fire,” and according to former Aston Martin chief executive Andy Palmer, manufacturers in Europe and the US face a “real and present danger” from the East.

Bottomline

GM, first added by BRK in 2012, now constitutes merely 0.2% of the conglomerate’s portfolio of marketable securities, which in turn is just a component of its holdings, which are comprised mainly of wholly owned businesses.

Therefore, instead of being denominator blind and jumping on the Buffett bandwagon, it could be wise for investors to hold their horses and verify if Western automakers can hold their own against Oriental challengers before making an investment decision.

High Stakes: Can Tesla (TSLA) and Netflix (NFLX) Surpass Earnings Expectations?

Posted on by The INO.com Team

Tesla, Inc. (TSLA), the undisputed leader in EVs, is scheduled to release its fiscal 2023 second-quarter results on July 19 after the closing bell. Analysts expect TSLA’s revenue to increase 45.7% year-over-year to $24.67 billion for the quarter that ended June 2023.
The consensus earnings per share (EPS) estimate of $0.82 for the about-to-be-reported quarter indicates an increase of 8.2% year-over-year. For the fiscal year ending December 2023, the EV maker’s revenue and EPS are expected to increase 24% and decrease 13.2% year-over-year to $100.98 billion and $3.53, respectively.

Streaming giant Netflix, Inc. (NFLX) is also set to report its second-quarter earnings after the market close on July 19, kicking off media earnings season. The company is expected to put light on its subscriber momentum, the progress of its cheaper advertising tier, and the impact of its password-sharing crackdown.

Analysts expect NFLX’s revenue for the fiscal second quarter (ended June 30, 2023) to increase 3.9% year-over-year to $8.26 billion. However, the consensus EPS estimate of $2.86 for the same quarter indicates a decline of 10.8% year-over-year.
In addition, the company’s revenue and EPS for fiscal year 2023 are expected to grow 7.7% and 13.5% year-over-year to $34.06 billion and $11.29, respectively.

Let’s analyze each stock and determine the chances of them surpassing analysts’ expectations:

TSLA designs, develops, manufactures, and sells electric vehicles (EVs) and energy generation and storage systems in the United States, China, and internationally. The company operates through two segments: Automotive; and Energy Generation and Storage.

TSLA recently released its second-quarter production and delivery numbers, easily beating estimates as the effects of the company’s price cuts, coupled with federal EV tax credits, boosted sales.

In April, the EV maker slashed prices of some of its Model Y and Model 3 EVs in the United States, the sixth time of lowering U.S. prices this year. TSLA’s Model Y “long range” and “performance” vehicles prices were cut by $3,000 each, and that of its Model 3 “rear-wheel drive” by $2,000 to $39,990.
Further, the Elon Musk-led company lowered prices in Europe, Israel, and Singapore along with Japan, Australia, and South Korea, expanding a discount drive it commenced in China in January to drive demand.

During the second quarter, TSLA produced approximately 480,000 vehicles and delivered nearly 466,000 vehicles. The delivery figures easily beat Wall Street consensus estimates of 448,599 units and the previous quarter’s total of 422,875. Both production and delivery figures for the second quarter were all-time records for the company.

Yet, TSLA, earlier in April, reported a 4% sequential increase in deliveries in the first quarter and a 17.8% sequential rise during the fourth quarter.
Furthermore, TSLA is rapidly expanding its Supercharger network with industry competitors. On July 7, German luxury giant Mercedes-Benz (MBG.DE) became the latest to join Tesla’s Supercharger network. Beginning in 2024, Mercedes-Benz electric vehicle owners would get access to 12,000 Tesla Superchargers across North America via the use of an adapter.

In 2025, new Mercedes EVs in North America would have TSLA’s North American Charging Standard (NACS) port built into the cars for access to the Supercharger network. This deal with Mercedes is similar to TSLA’s other charging partnerships with other automakers, Ford Motor Company (F), General Motors Company (GM), Rivian Automotive, Inc. (RIVN), and Volvo ADR (VLVLY).

On May 26, TSLA and F announced a surprise deal on electric vehicle charging technology and infrastructure. Under the agreement, Ford owners will get access to more than 12,000 Tesla Superchargers across the U.S. and Canada starting early next year.

In addition, GM followed crosstown rival F in partnering with TSLA to use its North American charging network and technologies. Under this deal, GM owners will get access to Tesla’s 12,000 fast chargers using an adapter and its EV charging app beginning the following year.
Signing on additional partners to TSLA’s charging network is expected to be a boon for the EV maker’s top line. According to Piper Sandler analyst Alexander Potter, charging deals from partners could add upward of $3 billion in revenue by 2030 and up to $5.40 billion by 2032.
The company’s first-quarter revenue of $23.33 billion was slightly below Wall Street estimates of $23.35 billion. It reported a gross margin of 19.3%, compared to 29.1% in the same period in 2022, as the cost of several price cuts hit its profitability.

Furthermore, TSLA’s net income was $2.51 billion for the first quarter, a decline of 24% year-over-year, and its EPS decreased 23% year-over-year to $0.73. TSLA’s CEO, Elon Musk, also indicated that the company would prefer higher volumes to higher margins.

Analysts continue to ring warning bells on the company’s profit margins. Gary Black, co-founder and managing partner of Future Fund expects TSLA’s adjusted EPS for the second quarter to be around $0.87, higher than the prior quarter’s $0.85 and the year-ago quarter’s $0.76. The consensus estimate stands at $0.82 per share.

However, Gary Black predicts the company’s gross margin to contract as it had offered discounts on its vehicles to boost sales.
Another stock that gears for second-quarter earnings this week is NFLX. The company offers entertainment services. It provides TV series, feature films, documentaries, and mobile games across various genres and languages.

In May, after ignoring password sharing for many years, the streaming company expanded its crackdown on password sharing across the United States and more than 100 other countries, alerting users that their accounts cannot be shared for free outside their households. It also stated that an additional fee of $7.99 per month would be charged for shared passwords in the United States.

Since the company told its users they could no longer share accounts across multiple households, daily U.S. sign-ups for the streaming service climbed by the most in at least four and a half years. According to data from the analytics platform Antenna, between May 25-28, Netflix witnessed the four single-largest days for signing up of U.S. customers since the firm began tracking this data in 2019.

During that time, NFLX saw nearly 100,000 daily sign-ups on two of the days, based on the report from Antenna.

Furthermore, the streaming giant’s ad-supported tier began to show signs of life six months following its debut. NFLX revealed that its ad-supported tier garnered five million active users globally, with sign-ups having more than doubled since early this year. The company stated that more than a quarter of new signups opt for the ad-supported plan in countries where it is offered.

During the first quarter of 2023 that ended March 31, NFLX reported mixed first-quarter results, missing Wall Street subscriber estimates while surpassing analysts’ EPS estimates. The company reported an EPS of $2.88 compared to the consensus estimate of $2.86. While its revenues increased 3.7% year-over-year to $8.16 billion, it missed the consensus estimate of $8.18.

For the first quarter, NFLX added 1.75 million streaming subscribers, which fell short of the analyst estimate of 2.06 million additions. However, its average paid memberships increased 4% year over year, while the paid net adds were 1.75 million for the quarter compared to a negative 0.2 million in the prior-year quarter. Also, its non-GAAP free cash flow rose 164% from the year-ago value to $2.12 billion.

In recent days and weeks, several analysts have raised their price targets on NFLX’s stock. One central theme across Wallstreet is an expectation of optimistic updates on the progress of the company’s password-sharing crackdown and advertising tier rollout.

TD Cowen analyst John Blackledge said, “Netflix’s paid sharing coupled with the ad tier rollout should drive long-term revenue upside, and the launch of paid sharing in the second quarter of 2023 along with the ramping ad tier should help drive membership and revenue growth in the second half of 2023.”
The TD Cowen analyst forecasts net subscriber growth of 2.37 million during the second quarter, compared with a consensus estimate of around 1.70 million, and “revenue re-acceleration” in the second half of 2023. John Blackledge reiterated his “outperform” rating and $500 stock price target.

Also, UBS analyst John Hodulik increased his stock price target from $390 to $525 while maintaining his Buy rating.

Hodulik stated, “We continue to believe paid sharing will drive 5 percent-plus uplift to revenue and see the roll-out as key to driving scale in advertising with the growth in the ad-tier mix and better targeting. Netflix eliminated its basic ad-free tier in Canada (and de-emphasized in the U.S.), which we estimate could provide a 10 percent uplift to average revenue per user over time and should help scale the ad base faster than prior expectations.”

The UBS analyst raised his estimates and predicted second-quarter financials would surpass management’s guidance, adding that he and his team “still expect accelerating second-half growth.” Hodulik expects 3.60 million net subscriber gains in the about-to-be-reported quarter and 6.50 million in the third quarter.

Bottom Line

EV giant TSLA’s better-than-expected delivery and production figures for the second quarter will likely boost the company’s second-quarter earnings. However, concerns still revolve around the impact on margins due to discounts Tesla offered on its new vehicles across different regions. But vehicle prices stabilized in the second quarter after substantial reductions announced earlier in the year.
While streaming company NFLX took a hit after reporting its first subscriber loss in a decade last year and mixed financials in the first quarter of 2023, there are higher chances of beating analysts’ estimates for the second quarter, with rising expectations of positive updates on the company’s progress on the password-sharing crackdown and advertising tier rollout.