Automakers Revving Up for 2011
Given our expectations of continued growth in sales and production in 2011, we review our current credit coverage list among the auto original-equipment manufacturers.
The recovery in global auto sales continues to progress as pent-up demand is being relieved by higher sales resulting from improving economies. Given our expectations of continued growth in sales and production in 2011, we thought it would be appropriate to review our current credit coverage list among the auto original-equipment manufacturers.
Most names have no economic moats and high uncertainty ratings, so we do not differentiate our ratings based on those qualitative factors. However, the balance sheets of the group are generally quite strong, with six of the nine having close to zero net debt or net cash, and the others being only mildly leveraged on a net debt/EBITDA metric. Our coverage list is global, including U.S., Japanese, and European manufacturers. Given the global nature of the industry, most of the firms issue debt in more than one currency, allowing them to match costs and revenue as well as take advantage of different funding sources. This also gives bond investors managing different currencies opportunities to invest. Finally, all have finance subsidiaries, and most issue debt at both the parent and finance sub levels.
In looking at the fundamentals, we forecast U.S. light-vehicle sales of about 13 million units in 2011. Although these levels are still below replacement demand, which we calculate to be nearly 13.7 million vehicles, it is better than the 10.4 million sold in 2009 and 2010's expectation of about 11.5 million units. With sales still running below scrappage, we believe there will be a substantial depletion of net cars in service over 2009-11. As such, we expect sales to return to a 15 million-plus rate by 2015. Looking at our auto sales and total population data in the following chart and multiplying the 2009 U.S. population by the average sales per capita for 1951-2009 gives a mean reversion sales total of 15.90 million vehicles. Another proxy of normative demand would be the same multiplication using a more recent per capita sales average. For example, using the per-capita average from 1976 to 2009 implies a normative demand of 17.31 million vehicles. The following chart shows how per capita sales plunged to all-time lows in the U.S. markets, for example, before beginning a recovery in 2010.
While the U.S. is an important market, the industry is truly global, and the best growth opportunities lie in the emerging markets such as China. As such, our view of global auto production becomes a relevant metric when assessing the sales potential at our list of names. The following table highlights the forecast of one of our equity analysts for global and regional vehicle production and annual growth.
China is actually the largest market in our production forecast, jumping ahead of Europe, which remains bigger than North America. China is also the fastest growing, with Europe showing somewhat more muted dynamics based on heavily government-encouraged buying related to scrappage programs primarily in 2009. Overall, strong worldwide growth combined with cost controls put in place during the downturn should result in improved credit metrics for the group.
The bonds offered by our coverage list are quite varied. Issuing markets include the United States, Europe, and Japan. Issuers include both the OEMs and, importantly, their captive finance subsidiaries. The following table provides indicative trading levels, with the caveat that spreads can vary quite a bit by specific market (euro and U.S. dollar, in this case), type of issuance (144a, MTNs), and the issuing entity (although all captive finance subs bonds listed below currently achieve the same ratings by the nationally recognized statistical rating organizations as their parents).
In comparing bonds in similar markets, we can make a few comments on relative value. In the highest-quality spectrum, we rate Honda (ticker: HMC; rating A+) and Toyota (ticker: TM; rating: A+) similarly, and the bonds noted in the preceding table are issued by each company's finance arm in U.S. dollars, but Honda tends to trade around 30 basis points wide of Toyota, so we would prefer Honda.
Staying with the Japanese manufacturers issuing in the U.S., Nissan (ticker: NSANY; rating: BBB+) trades about 65-100 basis points wide of Honda for a three-notch weaker credit, which we think is excessive, particularly in light of the Morningstar A+ index at about +80 basis points versus the BBB+ index at about +148, suggesting fair value differential of about +70 basis points. Plus the Nissan bonds are less than five years to maturity, suggesting relative spreads should be much tighter.
Moving on to the European issuers, BMW (ticker: BMW; rating: A-) trades pretty much on top of Volkswagen (ticker: VOW; rating: A-), which is appropriate for our ratings, although we would note that VW's U.S. dollar issues trade very tight relative to the rest of the universe and look unattractive.
Daimler (ticker DAI; rating: BBB+)bonds generally appear to be fair to rich, depending on the relative market. Renault and Ford (ticker: F; rating: BBB-) trade appropriately wide to the higher-quality names, although we would note that credit quality particularly at Ford has been on the upswing, so we can see further spread tightening as it continues to move up in credit quality. Ford 2031s trade almost 100 basis points wide of Daimler's 2031s, which we think is excessive for a two-notch parent rating differential, although Ford bonds are subordinated to a significant amount of secured debt. Peugeot (ticker: UG; rating: BB-) is by far the weakest credit, and its bonds do not appear to reflect the poor credit quality.
Rick Tauber does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.