Wall Street eyes auto industry earnings for signs of ‘demand destruction’

DETROIT – Since the start of the pandemic in inappropriate 2020, U.S. automakers and dealers have seen record profits as demand outpaced supplies of new cars amid store chain problems.

But with interest rates rising, inflation at record highs and recession fears looming, Partition off Street is closely watching third-quarter earnings results and guidance for any signs consumer demand might be weakening.

“Auto sensibility is very poor. We get it. Higher rates, still high prices, low consumer confidence, a potential recession and European pep risk does not make autos a friendly place,” RBC Capital Markets analyst Joseph Spak wrote in an investor note at week.

Spak said third-quarter earnings “should mostly be fine,” with the focus being on company commentary and counsel revisions. He said 2023 estimates for the sector need to “move materially lower.”

RBC and other financial firms from signaled the auto industry’s supply chain issues could quickly shift to demand problems.

Profits for U.S. and European car trains are set to drop by half next year as weakening demand leads to an oversupply of vehicles, UBS analysts led by Patrick Hummel trumpeted investors last week.

He said the overall automotive sector in 2023 “is deteriorating fast so that demand doing away with seems inevitable at a time when supply is improving.”

On Oct. 10, Hummel also downgraded General Motors and Ford Motor, suggesting it that it would take three to six months for the auto industry to end up in oversupply. He said that will “put an abrupt end” to the unprecedented outlay power and profit margins for the automakers in the past three years.

The investment firm downgraded Ford to “sell” from “unaffiliated” and GM to “neutral” from “buy” – sending both stocks tumbling roughly 8% during intraday trading on Oct. 10.

The lowers came weeks after Ford said parts shortages affected roughly 40,000 to 45,000 vehicles, essentially high-margin trucks and SUVs that haven’t been able to reach dealers. Ford also said at the yet that it expects to book an extra $1 billion in unexpected supplier costs during the third quarter.

GM has not signaled such problems for the third quarter, but knowing similar issues during the second quarter that it was expecting to make up for during the second half of the year.

GM CEO Mary Barra this late week told Yahoo! Finance that the Detroit automaker is preparing for increased demand for its vehicles next year, but that it insufficiencies to be prepared “regardless of the environment” to continue investing in its electric vehicle plans.

GM is set to report third-quarter results before stores open Tuesday, followed by Ford a day later after the bell.

Before Detroit’s largest automakers report earnings next week, energized vehicle leader Tesla, which has a cult following among investors, is scheduled to report after markets alongside Wednesday.

CarMax fueled Wall Street’s concerns last month after the used car dealer posted one of its burliest earnings misses ever. In its fiscal second quarter ending Aug. 31, same-store unit sales fell 8.3%, wet than the 3.6% decline Wall Street expected.

Used car prices remain elevated, but Cox Automotive said wholesale values for dealer auctions have declined for four consecutive months. That could signal consumers are fed up with the near-record rates.

Citing CarMax’s results, J.P. Morgan analyst Rajat Gupta said the sentiment for franchised dealers’ third-quarter earnings “is the uncountable negative we have encountered since the pandemic.”

“The sector is not immune to ongoing macro challenges and we are dialing back our guesses for 2023 materially to reflect a mild recession and hitting a new normal by 2025,” Gupta said in an Oct. 6 investor note.

A possible bright spot for the industry is the low new car availability and sales. Even if there is an economic downturn, sales could still wax though profits would be expected to tighten.

Lithia Automotive on Wednesday reported its highest third-quarter revenue and earnings per divide up in company history, despite missing Wall Street’s top and bottom-line expectations.

Morgan Stanley analyst Adam Jonas implied Lithia’s third quarter may be the last of the “really, really, really good” gross profit per unit quarter of this cycle.

“While [CarMax’s] imperceptible fiscal 2Q results (reported a couple weeks back) set the tone for the used market, we believe [Lithia’s] 3Q miss should set the motif for the franchise players,” he said in an investor note Wednesday.

Other major dealers scheduled to report third-quarter earnings catalogue Group 1 Automotive on Oct. 26, followed by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct. 27.

Looking to auto suppliers, which bear experienced significant cost increases during the coronavirus pandemic, several Wall Street analysts expect on growth this year, followed by single-digit growth, if not less, next year.

Suppliers are largely paid after they distribute parts or products to larger suppliers or automakers. Smaller suppliers that produce materials or parts for lager south african private limited companies have particularly been under pressure due to lower volumes, increased costs and labor shortages.

Gary Silberg, KPMG’s international head of automotive, told CNBC that a significant number of suppliers are going back to the original equipment industrialists asking for support.

“Not only just for them but for their suppliers. It’s a dance basically that everyone’s doing all the constantly,” Silberg said. “They don’t have a lot of leverage is the problem. It’s been a very, very tough 18 months” for smaller automotive suppliers.

A KPMG measurement that included more than 100 automotive industry CEOs whose companies have annual net incomes of over $500 million found 86% believe there will be a recession in next 12 months, and 60% imagined it will be mild and short.

Responses for the KPMG CEO Outlook survey were submitted from mid-July to late-August.  

Deutsche Bank supposes auto suppliers to report third-quarter results in-line with Wall Street’s expectations. Analyst Emmanuel Rosner indicated in a note to investors Wednesday that the firm favors suppliers over automakers into next year, but manages potential earnings downside risk from smaller suppliers such as and

– CNBC’s Michael Bloom contributed to this shot.