Stock Market Comment: Carmakers experience unprecedented sales plunge

• Carmakers see big drop in revenue in Q1 2020

• Decline in vehicle sales followed coronavirus spread

• Tesla (TSLA.US) shows unexpected improvement

• General Motors (GM.US) and BMW (BMW.DE) to release earnings next week

Four major carmakers - 2 from the United States and 2 from Germany - have already released earnings reports. What have we learned from those reports? Are carmakers gearing for a few more challenging quarters or do they see some green shots already? In this short commentary we will take a look at recent reports.

No surprise from headline figures… they are bad

It is being repeated over and over again that headline EPS and revenue numbers will not matter this earnings season. It is true as the real impact of the coronavirus outbreak should be visible in Q2 2020. Nevertheless, Q1 figures are an indicator of how dangerous is economic lockdown lasting as short as 1 month. In the table below we have presented some basic Q1 info for 4 big carmakers - Volkswagen, Daimler, Ford Motor and Tesla. As one can see Volkswagen, Daimler and Ford experienced big drops in revenue, unit vehicle sales, net income and EBIT. Tesla stands out among the rest as it managed to improve each of these measures. However, Tesla is a special case and we will get back to it later on.

Tesla reported an unexpected improvement in the Q1 2020. Not only it managed to increase profit and revenue but also vehicle unit sales. Source: Bloomberg, XTB Research

Decline in vehicle sales followed coronavirus spread

Taking a look at breakdown of vehicle sales, one can see that deterioration "followed" the spread of the virus. Sales dropped the most in Asia, followed by Europe. Vehicle sales of Daimler, Volkswagen and Ford declined the least in the United States as it was slow to impose coronavirus-related restrictions. This is important as it shows that, unsurprisingly, lifting restrictions will be crucial for recovery. However, lifting restrictions alone may not be sufficient in case demand does not recover. Having said that, it is key to watch industry data from China in April and May as it will be a good indicator of demand recovery. Should sales in China rebound in those months, a similar situation could take place in Europe and the United States.

Combined unit vehicle sales of Daimler, Volkswagen and Ford Motor declined in Asia-Pacific, Europe and North America on a year-over-year basis. Interestingly, Europe saw almost no drop on a quarter-over-quarter basis. Source: Bloomberg, XTB Research

What big carmakers expect next?

Figures mentioned in the previous paragraphs are truly disastrous. However, executives' comments to earnings releases were quite mixed. On one hand, Ford Motor said it expects EBIT in Q2 2020 to come in at negative $5 billion! On the other, German carmakers are more upbeat - Volkswagen still expects annual profit at a Group level while Daimler said it even expects a profit increase in the Mercedes-Benz Cars & Vans division this year. However, Daimler also expects the position of consumers to deteriorate and decided to set aside €448 million in provisions for defaults on leases and payments in the first quarter of 2020. This could be a move made out of caution but think about it for a while - will consumers buy new cars if they cannot even pay for the ones they have already bought?

What about Tesla? Are these numbers real?

So now let's get back to Tesla. Its Q1 results were stellar compared to other carmakers, weren't they? Not necessarily. Revenue from sales of emission contracts amounted to $354 million in Q1 2020 - that's an increase of over 60% YoY! This is a record so far for Tesla. If it was not for the abnormal volume of these sales, Tesla would most likely report quarterly loss, just as other carmakers did. However, there is one metric that cannot be so easily cheated - vehicle sales. A 40% jump in unit vehicle sales is definitely a feat but one should remember that Tesla is a relatively "young" carmaker and is still in the phase of ramping up production. Results in Q1 were supported by a new production plant in Shanghai. However, whether the company manages to reach its annual forecast of 500 thousand deliveries will depend on how fast factories in the United States reopen.

Being a Tesla (TSLA.US) shareholder could be labelled extreme sport given how much volatility this stock is enjoying . Stock declined over 60% between mid-February and mid-March but found support at 200-session moving average (purple line). The stock rallied more than 120% over the next month and is seen opening near $860 today. Price is getting within a striking distance of all-time highs. Source: xStation5

What's left on the agenda?

While most of the big carmakers released their Q1 earnings reports already, there are still some yet to report. General Motors (GM.US) and BMW (BMW.DE) will release quarterly earnings reports on Wednesday, May 6. It would be foolish to assume that results from these 2 companies would be like Tesla's rather than Volkswagen or Daimler. Big declines in revenue, earnings and unit sales will be reported. Earnings from General Motors will be especially interesting as the company already decided to suspend dividends and buybacks.