Transcript Sector/Industry Name - Front Page -

Equity Research
Region
Industry Report
Autos & Auto Parts
Morgan Stanley Autos Team
Presentation at Automotive World Congress
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Auto Parts & Auto Dealers: Back to the Future
July 18, 2015
Stephen Girsky (914) 225 4811
[email protected]
Please see analyst certification and other important disclosures starting on page 66.
Equity Research
Industry Report
Morgan Stanley Auto Team
North America
Autos & Auto Parts
Back to the Future
• Global update; Competitive pressures may shift
to Europe.
• North American environment; Back to the Future
• Competitive update; J3 starting to act like D3
• Supplier issues
• Questions
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
2
Equity Research
North America
Industry Report
Bottom Line
Morgan Stanley Auto Team
Autos & Auto Parts
This year could be challenging, particularly
the first quarter or two. The Industry is
generally better positioned to meet the
challenges than in the past, but it will not be
easy.
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
3
Equity Research
North America
Industry Report
Spending for Growth in a Stagnant Industry
Morgan Stanley Auto Team
Autos & Auto Parts
Global Vehicle Demand Weak
61,000
Units in 000
60,000
59,000
58,000
57,000
56,000
55,000
2000
2001
2002
2003
2004E
Please see analyst certification and other important disclosures starting on page 66.
Source: LMC-JD Power & Morgan Stanley Research
4
Equity Research
North America
Industry Report
Excess Global Capacity Estimated at 25-30%
Morgan Stanley Auto Team
Autos & Auto Parts
Global Capacity Utilization at 72% in 2003
80
Capacity
75
Million Units
70
65
60
Production
55
50
45
2003
Please see analyst certification and other important disclosures starting on page 66.
Source: Autofacts
5
Equity Research
North America
Industry Report
Yet OEMs are Still Spending for Growth (1)
Morgan Stanley Auto Team
Autos & Auto Parts
All OEMs have CAPEX ≥ D&A for 2004E
180
160
140
120
100
N
is
sa
BM n
W
M Kia
az
H da
o
H nd
y
M un a
its da
ub i
is
h
D i
C
X
R VW
en
au
l
PS t
FI A
To AT
yo
t
Fo a
rd
G
M
80
Please see analyst certification and other important disclosures starting on page 66.
Source: Company data & Morgan Stanley Research
6
Equity Research
North America
Industry Report
Capacity Growth in North America
Morgan Stanley Auto Team
Autos & Auto Parts
Additional Capacity from 2004-2007: 487,000 Units
Capacity Change ('000 Units)
600
467
400
250
200
100
0
-200
-400
2004
-330
2005
2006
2007
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
7
Equity Research
North America
Industry Report
Capacity Growth in Europe
Morgan Stanley Auto Team
Autos & Auto Parts
Additional Capacity from 2004-2006: 1.2 mm Units
Capacity Change ('000 Units)
700
600
500
445
300
140
100
2004
2005
2006
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
8
Equity Research
North America
Industry Report
Excess Capacity in China
Morgan Stanley Auto Team
Autos & Auto Parts
Additional Capacity by 2007: 5.8 mm Units
Industry Demand
Competitive Capacity
Capacity Utilization
9
90%
Million Units
7
70%
5
60%
50%
3
40%
1
Capacity Utilization
80%
30%
2003
2004E
2005E
2006E
2007E
2008E
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
9
Equity Research
North America
Industry Report
Zero Sum Game
Morgan Stanley Auto Team
Autos & Auto Parts
• Slow growth and excess capacity suggest
deflation/revenue pressures are likely to continue.
• Not everybody can be a winner.
• Winners will be low cost producers who deliver good
products that consumers are willing to pay for.
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
10
Equity Research
North America
Industry Report
EX Rates Shift Pressure to Europe
Morgan Stanley Auto Team
1.40
1.35
Autos & Auto Parts
115
USD / Euro
1.30
109
1.25
106
1.20
103
1.15
100
1/1/2004
7/1/2004
JPY / USD
112
1/1/2005
1/1/2004
5/1/2004
9/1/2004
1/1/2005
145
JPY / Euro
140
135
130
125
1/1/2004
5/1/2004
9/1/2004
1/1/2005
Please see analyst certification and other important disclosures starting on page 66.
Source: Factset, Morgan Stanley Research, Ex Rate and Japan Imports are 12 Mth Rolling
11
Equity Research
North America
Industry Report
EX Rate Critical for W Europe Market Share
Morgan Stanley Auto Team
Autos & Auto Parts
EX Rate & Market Share of Japanese Imports to W Europe
190
12%
Yen / Euro
Japan Import Share
170
10%
150
8%
130
6%
110
4%
90
1990/01
Mkt Shr
Yen/Euro
Corrlelation 78%
2%
1993/01
1996/01
1999/01
2002/01
Please see analyst certification and other important disclosures starting on page 66.
Source: Factset, Morgan Stanley Research, Ex Rate and Japan Imports are 12 Mth Rolling
12
Equity Research
Industry Report
Morgan Stanley Auto Team
North America
Autos & Auto Parts
North America: Back to the Future …
• Years leading to 2005 look eerily like the years
preceding the auto industry recession in 1980.
• During the early 80’s auto stocks were poor
performers, despite what appeared to be low
valuations.
• Stocks look cheap now, but they also looked cheap
then and stock performance proved to be poor.
• It’s the “E” that matters, not the “P/E”. Recently,
earnings have started to decline, time will tell if they
collapse similar to 80’s.
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
13
Equity Research
North America
Industry Report
Then Vs. Now - Similarities
Morgan Stanley Auto Team
Autos & Auto Parts
Mix Shift
Rising Raw Materials
Pricing Below Inflation
Energy Costs
Incentives Pulling Forward Demand
Please see analyst certification and other important disclosures starting on page 66.
14
Equity Research
North America
Industry Report
Increased Incentives Pulling Forward Demand?
Morgan Stanley Auto Team
Autos & Auto Parts
Increased terms & subsidized interest rates pull forward demand
64
45
Avg Auto Loan term
Up 20% pts
Up 14% pts
60
43
56
Avg Auto Loan term
41
52
39
Jan- Jul- Jan- Jul- Jan- Jul- Jan- Jul77
77 78
78 79 79 80
80
48
Jan00
Jul00
Jan01
12%
10%
8%
Jul01
Jan02
Jul02
Jan03
Jul03
11%
Incentive as % of
Vehicle Price
7%
6%
Then
Now
Please see analyst certification and other important disclosures starting on page 66.
Source: Federal Reserve Board, Morgan Stanley Research
15
Equity Research
North America
Industry Report
Mix Shifts to Low Profitable Products
Morgan Stanley Auto Team
Autos & Auto Parts
Sales change by segments
2004 vs. 2003
1980 vs. 1977
75%
Subcompact
Compact
-25%
Total Market
-28%
Intermediate -38%
Luxury -42%
Full Size -53%
Small SUV
18%
Crossover
13%
Large Pickup
7%
Large Van
6%
Luxury Car
4%
Minivan
3%
Total Market
1%
Middle SUV
0%
Luxury SUV
-1%
Middle Car
-1%
Small Car
-2%
Luxury
-3%
Large SUV
-6%
Small Pickup
-11%
Large Car -26%
-60% -35% -10% 15% 40% 65%
-30% -15% 0%
15% 30%
Please see analyst certification and other important disclosures starting on page 66.
Source: Autodata, Morgan Stanley Research
16
Equity Research
North America
Industry Report
Auto Prices Lags Inflation
Morgan Stanley Auto Team
Autos & Auto Parts
CPI New Vehicle vs. CPI All Items
140
CPI New Vehicles
108
CPI New Vehicles
CPI All Items
130
15% pts below
120
CPI All Items
105
11% pts below
102
110
99
100
Jan- Jul- Jan- Jul- Jan- Jul79 79 80 80 81 81
96
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Please see analyst certification and other important disclosures starting on page 66.
Source: Bureau of Labor Statistics, Morgan Stanley Research
17
Equity Research
North America
Industry Report
Energy Cost Constrains Consumer Budget
Morgan Stanley Auto Team
Autos & Auto Parts
CPI Motor Fuel vs. CPI All Items
200
180
CPI Motor Fuel
CPI All Items
180
CPI Motor Fuel
CPI All Items
160
160
56% pts below
140
140
120
61% pts below
120
100
Jan- Jul- Jan- Jul- Jan- Jul79 79 80 80 81 81
100
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Please see analyst certification and other important disclosures starting on page 66.
Source: Bureau of Labor Statistics, Morgan Stanley Research
18
Equity Research
North America
Industry Report
Affordability – Big Positive Factor
Morgan Stanley Auto Team
Autos & Auto Parts
Household Income to Monthly Payment Ratio
13%
Absolute Chg is 80
bps or 6.8% increase
(2Q82 over 1Q77)
12%
11%
10%
9%
8%
1Q77
Absolute Chg is (60)
bps or 6.9% Decrease
(3Q04 over 4Q00)
1Q80
1Q83
1Q86
1Q89
1Q92
1Q95
1Q98
1Q01
1Q04
Please see analyst certification and other important disclosures starting on page 66.
Source: Federal Reserve Board, Morgan Stanley Research
19
Equity Research
North America
Industry Report
Demand Hit Record Levels, But
Morgan Stanley Auto Team
Autos & Auto Parts
Units in
Millions
Challenges are on the horizon
16
18
15.6
15.0
17.4
17.2
17.0
16.9
16.8
16.7
15
14.4
17
14
13.4
16.6
13
12
11.2
11
16
11.7
15.6
11.0
15.2
10.6
15
10
1975 1976 1977 1978 1979 1980 1981 1982
1997
1999
2001
2003
2005E
Please see analyst certification and other important disclosures starting on page 66.
Source: Autodata, Morgan Stanley Research
20
Equity Research
North America
Industry Report
Then vs. Now - Differences
Morgan Stanley Auto Team
Autos & Auto Parts
Demand back then was farther above previous trough levels than it is
today, possibly suggesting less over-saturation today
• Then – Demand 39% above trough & hit peak
• Now – Recent peak was 18% above most trough & has fallen by 3% from
peak in 2000
Affordability was worsening then, spurned by higher prices and a rise in
interest rates
• Then – Avg monthly payment up 36% between 1977-1980
• Now – Avg monthly payment down 5% between 2001-2004
Finance Companies were a much less significant profit driver than they
are today
Please see analyst certification and other important disclosures starting on page 66.
21
Equity Research
North America
Industry Report
OEM Share Gains & Losses
Morgan Stanley Auto Team
Autos & Auto Parts
Market Share Change: 2004 vs. 2003
1.2%
0.8%
0.4%
0.0%
-0.4%
-0.8%
-1.2%
i W ai da ar di B W hi M rd
a
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a
X
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a yo C K zu M nd n u Au A V is G o
s
g
A
F
D
s
o
b
i
u
o
u
a
B
S
u
H
S
J
N T
Hy
its
M
Please see analyst certification and other important disclosures starting on page 66.
22
Source: Autodata, Morgan Stanley Research
Equity Research
North America
Industry Report
J3 starting to act like D3
Morgan Stanley Auto Team
Autos & Auto Parts
•J3 are among the most profitable auto companies. However, recent actions
(pursuing share at expense of cost, increased incentives/fleet sales) indicate that
U.S. market is tough for everyone.
•Toyota
• has very public market share ambitions
•Toyota has aggressive capacity expansion plans
•Toyota fleet sales up 30% in Nov.
•Nissan struggles with MS product launches
•Honda uses significant incentives at year-end
Please see analyst certification and other important disclosures starting on page 66.
Source: Wards & Morgan Stanley Research
23
Equity Research
North America
Industry Report
J3 Starting to Act Like D3
Morgan Stanley Auto Team
Autos & Auto Parts
Japanese OEMs’ Market Share in U.S.
35%
J3
30%
25.5%
25%
5.2%
Other Japanese OEMs
28.8%
27.6%
26.6%
4.7%
5.4%
5.4%
30.4%
4.2%
20%
15%
10%
20.3%
21.3%
22.2%
24.1%
2000
2001
2002
2003
26.3%
5%
0%
2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Wards & Morgan Stanley Research
24
Equity Research
North America
Industry Report
Japanese Manufacturers Step on Gas
Morgan Stanley Auto Team
Autos & Auto Parts
Incentive Growth: Dec-04 vs. Dec-03
60%
53%
50%
42%
40%
30%
20%
9%
10%
0%
-10%
-6%
-6%
Chrysler GM
-5%
Ford
-4%
Market Toyota Honda Nissan
Please see analyst certification and other important disclosures starting on page 66.
Source: NHTSA, Department of Energy, Autodata & Morgan Stanley Research
25
Equity Research
North America
Industry Report
Incentive Gap Narrowed In Recent Months
Morgan Stanley Auto Team
Autos & Auto Parts
Detroit 3
European
4,200
Asian
Average
3,100
2,000
900
Jan-04
Apr-04
Jul-04
Oct-04
Please see analyst certification and other important disclosures starting on page 66.
Source: Company data & Morgan Stanley Research
26
Equity Research
North America
Industry Report
Global Operating Margin
Morgan Stanley Auto Team
Autos & Auto Parts
2003 Operating Margin
Nissan
Toyota
Hyundai
BMW
Honda
GM (ex.OPEB)
DCX (ex.OPEB)
PSA Group
Kia
DCX
Renault
VW
Ford (ex.OPEB)
GM
Ford
FIAT
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Please see analyst certification and other important disclosures starting on page 66.
27
Source: Company Data; Morgan Stanley Research, GM/F/DCX Pro-forma exclude OPEB & Pension
Equity Research
North America
Industry Report
Detroit3 Cost Disadvantage
Morgan Stanley Auto Team
Autos & Auto Parts
Pension and OPEB Cost/Unit Produced
2003
GM
Ford
Chrysler*
Toyota
2002
2001
$1,824
$1,460
$1,287
$571
$1,023
$499
$985
$186
$526
$191
$989
$163
Please see analyst certification and other important disclosures starting on page 66.
Source: ($$ in MM) Company Data; Morgan Stanley Research
28
Equity Research
North America
Industry Report
Detroit 3 Revenue Disadvantage
Morgan Stanley Auto Team
Autos & Auto Parts
Actual vs. Perceived Quality by Brand
40
Actual Quality < Perceived Quality =
Share Risk
20
0
-20
-40
Actual Quality > Perceived Quality =
Share Opportunity
-60
M
er
c
In ury
fin
Bu it i
Li ick
n
C co
hr ln
ys
Le ler
O Po xus
l d rs
sm ch
ob e
il
Sa e
Ac ab
Su ur
ba a
To ru
C yo
ad ta
N illac
iss
an
Je
Su ep
z
H uk
on i
d
C
he
Fo a
vr M rd
ol a
et zd
/G a
Ja eo
Po gua
n r
Sa t iac
t
D u rn
od
g
Is e
uz
BM u
W
H Au
M yun di
its d
M ubi ai
er sh
ce i
de
Vo
lks Vo s
w lvo
ag
R
e
an
ge Kn
Ro ia
ve
r
-80
Please see analyst certification and other important disclosures starting on page 66.
Source: CNW, JD Power, Morgan Stanley Research
29
Equity Research
North America
Industry Report
Autos & Auto Parts
Detroit 3 U.S. OPEB Plan Deficits
Morgan Stanley Auto Team
Detroit 3 U.S. OPEB Funding Status
In $mm
2003
2002
GM
($57,544)
($51,401)
Ford
($28,797)
($27,429)
Chrysler*
($16,875)
($14,377)
Please see analyst certification and other important disclosures starting on page 66.
Source: ($ in MM) *Chrysler : Non-German Plans; Company Data; Morgan Stanley Research
30
Equity Research
North America
Industry Report
Detroit 3 Positives & Negatives
Morgan Stanley Auto Team
Autos & Auto Parts
• General Motors (GM, E-W, $37)
–
–
–
–
New products expected to gain share & improve margins; data not conclusive
Europe is a continuing problem.
Chinese demand weakening.
Finance company earnings holding up relatively well in an increasingly difficult
environment.
• Ford Motor Company (F, E-W, $14)
– Market share under pressure. Mgmt pursue profitable share strategy, which works as
long as the market is growing or they can continue to close capacity
– Premier Auto Group results still lagging; Jaguar restructuring ensuing.
– Earnings have exceeded expectations. Now cash flow needs to catch up.
• DaimlerChrysler (DCX, O-W, €35 , target €38.00)
–
–
–
–
–
Successful new products are enabling DCX to separate itself from GM & Ford.
Chrysler share is up, incentives down, & inventories in relatively good shape.
Renewed fiscal discipline in the after-math of Mitsubishi affair is positive.
Commercial truck business at DCX could be source of positive earnings surprise.
Chrysler faces perceived quality problems. Mercedes has actual quality problems.
Please see analyst certification and other important disclosures starting on page 66.
Source: ILX, Company Data, Stock Price as of Jan 7, 2004
31
Equity Research
North America
Industry Report
GM’s U.S. Market Share
Morgan Stanley Auto Team
33%
Autos & Auto Parts
32.8%
32%
31.3%
31.1%
31%
30%
29.1% 29.1%
29%
28%
28.0% 28.1%
28.4%
28.0%
27.3%
27%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Autodata, Morgan Stanley Research
32
Equity Research
North America
Industry Report
GM’s Fleet % of Total Sales Is Rising
Morgan Stanley Auto Team
Autos & Auto Parts
27%
24.6%
23%
19%
21.1%
18.4%
18.8%
FY2001
FY2002
15%
FY2003
9-Mth 2004
Please see analyst certification and other important disclosures starting on page 66.
33
Source: Company Data, Morgan Stanley Research
Equity Research
North America
Industry Report
GM ‘True’ Capacity Utilization < 86% Stated
Morgan Stanley Auto Team
100%
80%
60%
40%
Autos & Auto Parts
Excess capacity at 14% = 900K Units = 5 Plants
Fleet sales at 21% = 1,300K Units = 7 Plants
Employee & Affliated at 10% = 600K Units = 3 plts
True Retail sales at 55% = 3,400K Units =
19 Plants
20%
0%
YTD 3Q04, Total 34 Plants
Please see analyst certification and other important disclosures starting on page 66.
34
Source: Company Data, Morgan Stanley Research
Equity Research
North America
Industry Report
GM N.A.O. Margins Remain Slim
Morgan Stanley Auto Team
Autos & Auto Parts
GM N.A.O. Margins
Year
FY 2002
FY 2003
YTD
2004
YTD
2003
Pre-tax
Margin
3.7%
1.2%
1.1%
1.1%
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
35
Equity Research
North America
Industry Report
GM Has Not Made Money In Europe in 5 Yrs
Morgan Stanley Auto Team
Autos & Auto Parts
GM Europe Net Income
2000
2001
2002
2003
YTD
2004
5-Yr
Total
Net
(257)
Income
(767)
(549)
(286)
(397)
(2,256)
Year
Please see analyst certification and other important disclosures starting on page 66.
36
Source: Company Data, Morgan Stanley Research
Equity Research
North America
Industry Report
GM China Sales Decelerating & Declining
Morgan Stanley Auto Team
Autos & Auto Parts
GM China Sedan Sales YoY Growth: 2004 vs. 2003
250%
231%
200%
150%
120%
116%
100%
81%
51%
67%
50%
23%
11%
0%
-26%
-50%
Jan
Feb
Mar
Apr
May
Jun
Jul
-36% -35%
Aug Sep Oct Nov
Please see analyst certification and other important disclosures starting on page 66.
Source: CAIC, Morgan Stanley Research
37
Equity Research
North America
Industry Report
Ford’s U.S. Market Share Is Declining
Morgan Stanley Auto Team
26% 25.7% 25.4%
25.2%
24%
Autos & Auto Parts
24.9%
23.8%
23.0%
22%
21.9%
20.2%
20%
19.5%
18.3%
18%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Autodata, Morgan Stanley Research
38
Equity Research
North America
Industry Report
Ford’s Fleet % of Total Sales
Morgan Stanley Auto Team
Autos & Auto Parts
27%
25.6%
25%
24.4%
23.8%
22.5%
23%
21%
FY2001
FY2002
FY2003
9-Mth 2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
39
Equity Research
North America
Industry Report
Ford Capacity Utilization Is Declining
Morgan Stanley Auto Team
Autos & Auto Parts
Demand Decline of 1.1 mm vs. Capacity Cut of 0.3 mm
Production
Capacity
% Utilization
110%
4,400
100%
4,100
Utilization
Capacity/Production in '000 Units
4,700
3,800
90%
3,500
3,200
80%
1999
2000
2001
2002
2003
2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Wards, Autodata, Morgan Stanley Research
40
Equity Research
North America
Industry Report
Ford N.A.O. Revenue Holding Up
Morgan Stanley Auto Team
Autos & Auto Parts
Ford N.A.O. Revenue / Unit
$23,000
$22,697
$22,500
$22,274
$22,000
$21,343
$21,500
$21,000
$20,678
$20,500
$20,000
3Q01
3Q02
3Q03
3Q04
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data (Excl. FIN46), Morgan Stanley Research
41
Equity Research
North America
Industry Report
One Product Company?
Morgan Stanley Auto Team
Autos & Auto Parts
F-Series Sales as % of Total Company Sales
30%
30%
27%
26%
24%
24%
2001
2002
24%
21%
22%
22%
22%
1998
1999
2000
20%
18%
15%
1997
2003
2004
Please see analyst certification and other important disclosures starting on page 66.
42
Source: Company Data, Morgan Stanley Research
Equity Research
North America
Industry Report
Ford New Product Monitor
Morgan Stanley Auto Team
Autos & Auto Parts
Chicago Plant: Freestyle, Five
Hundred, Montego
Mustang
Sales
SAAR
Days'
Sup
68 Oct-04
5,787
73,317
113
185,672
40 Nov-04
9,395 132,491
84
173,988
41 Dec-04
10,414 129,954
113
Sales
SAAR
Oct-04
9,232
117,493
Nov-04
12,816
Dec-04
13,342
Days'
Sup
Please see analyst certification and other important disclosures starting on page 66.
Source: Wards & Morgan Stanley Research
43
Equity Research
North America
Industry Report
Ford N.A.O. Margins Slim
Morgan Stanley Auto Team
Autos & Auto Parts
Ford N.A.O. Margins
Year
Pre-tax
Margin
FY 2002 FY 2003
2.9%
2.1%
YTD
2004
YTD
2003
3.1%
2.6%
Please see analyst certification and other important disclosures starting on page 66.
44
Source: Company Data, Morgan Stanley Research
Equity Research
North America
Industry Report
Chrysler’s U.S. Market Share
Morgan Stanley Auto Team
Autos & Auto Parts
17%
16.2%
16.1%
16%
15.6%
15.2%
15%
14.7%
14.5%
14%
13.2% 13.1%
12.8%
13%
13.0%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Please see analyst certification and other important disclosures starting on page 66.
Source: Autodata, Morgan Stanley Research
45
Equity Research
North America
Industry Report
Chrysler’s Fleet % of Total Sales Is Stable
Morgan Stanley Auto Team
Autos & Auto Parts
25%
23.7%
23.8%
FY2003
9-Mth 2004
23%
21.7%
21%
20.8%
19%
FY2001
FY2002
Please see analyst certification and other important disclosures starting on page 66.
Source: Company Data, Morgan Stanley Research
46
Equity Research
North America
Industry Report
Morgan Stanley Auto Team
Autos & Auto Parts
Chrysler Operating Margins
Chrysler Operating Margins
Year
Pre-tax
Margin
FY 2002 FY 2003
2.2%
(0.1%)
YTD
2004
(Est.)
YTD
2003
2.7%
(1.7%)
Source: Company Data, Morgan Stanley Research * Worldwide operations
Please see analyst certification and other important disclosures starting on page 66.
47
Equity Research
North America
Industry Report
OE Supplier Overview
Morgan Stanley Auto Team
Autos & Auto Parts
• Near-term drivers are tough
–Volume / Mix
–Raw Materials
• Secular challenges remain
–Customer Share Loss
–Low cost sourcing
–Labor / Pension / Medical Costs
• Winning models exist despite challenges
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
48
Equity Research
North America
Industry Report
Near-Term Drivers are Tough
Morgan Stanley Auto Team
Drivers
Autos & Auto Parts
Now
Outlook
N.A. Lt. Vehicle
Production Forecast
Inventory Levels
Class 8 Truck & Orders
Raw Materials
European Market
Please see analyst certification and other important disclosures starting on page 66.
Source: Global Insight; Morgan Stanley Research
49
Equity Research
North America
Industry Report
Raw Materials Costs Increased
Morgan Stanley Auto Team
Autos & Auto Parts
Pounds/
Vehicle
$ / Lb
(Spot)
Total
Cost
$/Lb Last
Yr
Total
Cost
YoY
Chg
2003
Weight
1,352.5
$0.39
$522
$0.19
$258
($263)
102.0%
40%
-6.6%
379.0
$0.32
$120
$0.23
$89
($31)
34.7%
11%
-3.9%
Stainless Steel
56.5
$0.65
$37
$0.61
$35
($2)
6.4%
2%
-0.9%
Other Steel (HR as
Proxy)
26.5
$0.33
$9
$0.16
$4
($5)
108.0%
1%
-6.3%
Iron
328.0
$0.08
$26
$0.06
$21
($5)
23.7%
10%
-21.3%
Aluminum
279.5
$0.84
$235
$0.69
$192
($43)
22.5%
8%
8.5%
Plastic/Plastic
Composites
255.0
NA
NA
NA
NA
NA
NA
8%
NA
Fluids and Lubricants
198.0
NA
NA
NA
NA
NA
NA
6%
NA
Rubber
149.0
$0.22
$32
$0.22
$33
$1
-3.3%
4%
4.0%
Glass
98.5
NA
$75
$0.76
$75
$0
0.0%
3%
0.0%
Copper and Brass
50.0
$1.38
$69
$0.88
$44
($25)
57.4%
1%
4.9%
Powder Metal Parts
40.5
NA
NA
NA
NA
NA
NA
1%
NA
Magnesium Castings
9.5
NA
NA
NA
NA
NA
NA
0%
NA
Zinc Die Castings
8.5
$0.54
$5
0.42
$4
($1)
28.4%
0%
16.8%
127.5
NA
NA
NA
NA
NA
NA
4%
NA
$754
($374)
49.6%
100%
-2.2%
4Q04
Regular Steel Sheet
High/ Med-Strength Steel
Other Materials
Total
3,358.5
$1,128
$
Estimated $374 cost increase per
vehicle versus year-ago
Please see analyst certification and other important disclosures starting on page 66.
$ Diff.
QoQ
Chg
OEMs are not running to pick
up the impact
Source: Wards & Morgan Stanley Research
50
Equity Research
North America
Industry Report
Revenues not Falling to Bottom Line
Morgan Stanley Auto Team
Autos & Auto Parts
Aggregate OE Supplier vs. EBIT
Aggregate Revenues
Aggregate EBIT
160,000
155,000
Variable Margin
150,000
6,000
-10.8%
2.7%
5,800
5,600
145,000
5,400
-9.6%
140,000
5,200
135,000
5,000
130,000
125,000
4,800
120,000
4,600
2002
2003
2004E
2005E
Please see analyst certification and other important disclosures starting on page 66.
51
Equity Research
North America
Industry Report
Secular Challenges Persist
Morgan Stanley Auto Team
Autos & Auto Parts
• Volatility in OEM market share
–Spurs need to diversify
• Labor costs
–Low value added products require low
cost labor
• Re-consolidation of supply base
–Companies un-doing what they did in the
late 1990’s-early 2000’s.
Please see analyst certification and other important disclosures starting on page 66.
52
Equity Research
North America
Industry Report
Low Labor Costs Risk and Opportunity
Morgan Stanley Auto Team
Autos & Auto Parts
Labor Cost Indexed to U.S.
100
100 98
87
80
80
62
60
40
20
56
32
27
13
11
11
7
6
4
3
3
1.5
UK
Ja
pa
n
Ko
re
Ta a
iw
a
Tu n
rk
e
M y
ex
ic
Po o
l
Ro and
m
a
Th nia
ai
la
nd
C
Ph hin
ilip a
pi
ne
s
In
d
In
do ia
ne
sia
U
G SA
er
m
an
Fr y
an
Sw ce
ed
en
0
Please see analyst certification and other important disclosures starting on page 66. Source: Autoliv, Morgan Stanley Research
53
Equity Research
Industry Report
Morgan Stanley Auto Team
North America
Autos & Auto Parts
Components at risk include those with:
• High labor portion of total value
• High environmental costs
• Logistical costs: Easy to ship some components vs.
others. For example, wheels and tires vs. seats
Beware of extending supply lines and operating in countries
with low scale and little experience.
Please see analyst certification and other important disclosures starting on page 66.
Source: Morgan Stanley Research
54
Equity Research
North America
Industry Report
Winning Business Models Exist
Morgan Stanley Auto Team
Autos & Auto Parts
• Modest margins / rapid asset turnover may be
better than high margins.
• More diversified customer exposure
• High share in category more important than
overall size
Please see analyst certification and other important disclosures starting on page 66.
55
Equity Research
North America
Industry Report
Re-Consolidation of the Supply Base
Morgan Stanley Auto Team
Autos & Auto Parts
• Dana divests aftermarket business
• ArvinMeritor announces intention to divest its
aftermarket operations
• Cooper Tire divests Automotive Products
Group
• Visteon announces intention to restructure.
Please see analyst certification and other important disclosures starting on page 66.
56
Equity Research
Region
Industry Report
Morgan Stanley Autos Team
[email protected]
July 18, 2015
Please see analyst certification and other important disclosures starting on page 66.
Equity Research
North America
Industry Report
Important U.S. Regulatory Disclosures
Morgan Stanley Auto Team
Autos & Auto Parts
Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report
are accurately expressed and that they have not received and will not receive direct or indirect compensation in
exchange for expressing specific recommendations or views in this report: Stephen Girsky.
Important US Regulatory Disclosures on Subject Companies
The information and opinions in this report were prepared by Morgan Stanley & Co. International Limited and its
affiliates (collectively, "Morgan Stanley").
As of December 31, 2004, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of
the following companies covered in this report: GM, DCX, GT, LAD, TWR, CONG.DE.
Please see analyst certification and other important disclosures starting on page 66.
58
Equity Research
North America
Industry Report
Ratings Distribution and Definitions
Morgan Stanley Auto Team
Autos & Auto Parts
Global Stock Ratings Distribution
(as of December 31, 2004)
Coverage Universe
Stock Rating Category
Count
Overweight/Buy
Equal-Weight/Hold
Underweight/Sell
Total
632
880
374
1,886
% of
Total
Investment Banking Clients (iBC)
% of
% of Rating
Count
Total IBC
Category
34%
47%
20%
249
310
99
658
38%
47%
15%
39%
35%
26%
Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely
corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the
equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's
existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
ANALYST STOCK RATINGS
Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage
universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on
a risk-adjusted basis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a
quantitative assessment of historical data, or in the analyst’s view, it is likely to become materially more volatile over the next 1-12 months compared with
the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that
securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy;
OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts.
ANALYST INDUSTRY VIEWS
Attractive (A). The analyst expects the performance of his or her industry coverage universe to be attractive vs. the relevant broad market benchmark over
the next 12-18 months.
In-Line (I). The analyst expects the performance of his or her industry coverage universe to be in line with the relevant broad market benchmark over the
next 12-18 months.
Cautious (C). The analyst views the performance of his or her industry coverage universe with caution vs. the relevant broad market benchmark over the
next 12-18 months.
Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also
request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.
Please see analyst certification and other important disclosures starting on page 66.
59
Equity Research
North America
Industry Report
Other Disclosures
Morgan Stanley Auto Team
Autos & Auto Parts
Other Important Disclosures
This research report has been published in accordance with our conflict management policy, which is available at
www.morganstanley.com/institutional/research/conflictpolicies.
For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these
targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at
www.morganstanley.com and other electronic systems.
This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and
objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors
independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a
particular investment or strategy will depend on an investor’s individual circumstances and objectives.
This report is not an offer to buy or sell any security or to participate in any trading strategy. In addition to any holdings disclosed in the section entitled
"Important US Regulatory Disclosures on Subject Companies", Morgan Stanley and/or its employees not involved in the preparation of this report may have
investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this
report. Derivatives may be issued by Morgan Stanley or associated persons.
Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making
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Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no
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With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Facts
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Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel
expenses for such visits.
Please see analyst certification and other important disclosures starting on page 66.
(continued on next page)
60
Equity Research
North America
Industry Report
Other Disclosures (Continued)
Morgan Stanley Auto Team
Autos & Auto Parts
Other Important Disclosures (continued)
The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes,
operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities
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This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley.
Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form.
Additional information on recommended securities is available on request.
Please see analyst certification and other important disclosures starting on page 66.
© 2004 Morgan Stanley
61
Equity Research
North America
Industry Report
It Is “E” Which Matters in “P/E”
Morgan Stanley Auto Team
Autos & Auto Parts
• P/E remained low for auto stocks throughout the late 1970’s.
Weak stock prices were a function of declining earnings and P/E
contraction. As “E” collapsed in 1980 / 1981, share prices fell
more severely.
• Recently, EPS of Big 3, while up from 2001 level, are off their
1999 peak. We expect a modest decline in 2005, although a
more sever decline is possible depending upon demand, mix,
and costs, among other factors.
• Today, auto and auto parts stocks also appear cheap, but the
lesson of the past is that the “E” (earnings) is what matters, not
the “P/E”. And “E” can be very volatile
Please see analyst certification and other important disclosures starting on page 66.
62
Source: Factset, Morgan Stanley Research
Equity Research
North America
Industry Report
Detroit 3 EPS
Morgan Stanley Auto Team
Autos & Auto Parts
GM ($)
Ford ($)
Chrysler ($)
DCX (€)
1976
5.0
0.9
1.2
1977
5.8
1.5
0.5
1978
6.1
1.4
(0.8)
1979
5.0
1.0
(3.8)
1980
(1.3)
(1.3)
(5.8)
1981
0.5
(1.0)
(1.6)
1982
1.5
(0.6)
(0.3)
1983
5.9
1.7
0.5
1999
8.9
5.8
6.2
2000
8.4
3.3
3.5
2001
3.2
(0.4)
0.7
2002
6.6
0.5
3.3
2003
5.6
1.1
0.9
2004E
6.3
2.2
3.3
2005E
4.8
1.9
3.1
……
Please see analyst certification and other important disclosures starting on page 66.
63
Source: Factset, Morgan Stanley Research
Equity Research
North America
Industry Report
Toyota Asset Turns vs. Operating Margin
Morgan Stanley Auto Team
Autos & Auto Parts
8.0%
2003
7.5%
Operating Margin
7.0%
2002
6.5%
2001
6.0%
5.5%
2000
5.0%
1999
4.5%
4.0%
1.00
1.05
1.10
1.15
1.20
1.25
Asset turns
Please see analyst certification and other important disclosures starting on page 66.
Source: Company data, Morgan Stanley Research
64
Equity Research
North America
Industry Report
GM Asset Turns vs. Operating Margin
Morgan Stanley Auto Team
Autos & Auto Parts
5%
1999
Operating Margin
4%
3%
2000
1998
2%
2002
1%
2001
2003
0%
1.0
1.1
1.1
1.2
1.2
1.3
1.3
1.4
1.4
1.5
Asset Turns
Please see analyst certification and other important disclosures starting on page 66.
Source: Company data, Morgan Stanley Research
65
Equity Research
North America
Industry Report
Ford Asset Turns vs. Operating Margins
Morgan Stanley Auto Team
Autos & Auto Parts
6%
1999
2000
5%
1998
Operating Margin
4%
3%
2%
1%
2003
0%
2002
-1%
2001
-2%
1.10
1.15
1.20
1.25
1.30
1.35
Asset Turns
1.40
1.45
1.50
1.55
1.60
Source: Company data, Morgan Stanley Research
Please see analyst certification and other important disclosures starting on page 66.
66
Equity Research
North America
Industry Report
DCX Asset Turns vs. Operating Margin
Morgan Stanley Auto Team
Autos & Auto Parts
8%
1999
7%
1998
1996
6%
Operating Margin
1997
5%
4%
2003
2002
2000
3%
2%
1%
2001
0%
1995
-1%
0.75
0.95
1.15
1.35
1.55
Asset Turns
1.75
1.95
2.15
Source: Company data, Morgan Stanley Research
Please see analyst certification and other important disclosures starting on page 66.
67
Equity Research
North America
Industry Report
VW Asset Turns vs. Operating Margin
Morgan Stanley Auto Team
Autos & Auto Parts
7%
2001
6%
Operating Margin
2002
5%
2000
4%
1998
3%
2003
2%
1999
1%
1.30
Note: Transitioned to IAS in 2001
1.50
1.70
1.90
Asset Turns
2.10
2.30
2.50
Source: Company data, Morgan Stanley Research
Please see analyst certification and other important disclosures starting on page 66.
68
Equity Research
North America
Industry Report
3-Year Stock Return (Jan-02 To Dec-04)
Morgan Stanley Auto Team
Autos & Auto Parts
80%
60%
60%
40%
26%
20%
2%
0%
-7%
-20%
-18%
-27%
-40%
-37%
-60%
Nissan
Toyota
Honda
Ford
GM
DCX
VW
Please see analyst certification and other important disclosures starting on page 66.
Source: Factset, Morgan Stanley Research, Stock price as of Nov 4, 2004
69