EUROPE：AUTOMOBILES：RESETTING_OUR_RATINGS_ON_EUROPEAN_OEMS：REITERATE_CL_BUY_ON_VW-2012-12-28.ppt

,november 2, 2012 europe: automobiles equity research resetting our ratings on european oems: reiterate cl buy on vw reiterating vw as conviction buy,vw has emerged as one of the leaders of the global automotive industry,ratings and price targets,with a broad geographical footprint and diversified brand portfolio. the,old rating,new rating,new 12m pt,old 12m pt,upside potential,company is leading the industry in maximising economies of scale, leveraging its global sales footprint onto an advanced modular vehicle architecture. with vw trading at 0.65x ev/ic, we calculate that the market is factoring in a 5.8% roic into perpetuity; by contrast, we forecast an,bmw daimler fiat porsche psa renault vw * conviction list,buy buy* buy* neutral sell neutral buy*,buy buy neutral neutral sell neutral buy*, ,107 59 4.7 71 2.7 44 289,107 78 7.7 68 4.5 50 280,74% 64% 25% 39% -45% 27% 81%,average 8.5% roic over 2012-14. vw remains on our conviction buy list, with a new 12-month price target of 289 (was 280)., nav methodology source: goldman sachs research estimates,coverage view: attractive daimler off conviction buy list, remains buy daimler management was caught out by the market deterioration in trucks,execution issues in china and structural costs in mcg. we remove daimler from our conviction list, but retain a buy rating. we highlight weak market sentiment, low consensus expectations, a “stable and safe” dividend, and building internal/external pressure (often a key catalyst for change at daimler). we also see cyclical recovery potential in 2h13 supported by two key efficiency programmes in trucks and mcg and further upside from structural changes to daimlers business system in the medium term. our new 12-month price target is 59 (was 78). fiat off conviction buy list, downgrading to neutral our investment case for fiat has been altered by three key factors: (1) european losses will continue to be a drain on group resources in terms of both management time and liquidity for longer than expected; (2) the revised strategic plan for europe and the commitment to italy and european production will absorb 3 bn more capital over the next three years at the group level; and (3) it is unclear how fiat can fund the buy-out of the chrysler minorities. in addition, equity value is squeezed by higher fy12e net industrial debt and ias 19 pension impact. we now have a neutral rating with a new 12-month price target of 4.70 (was 7.70). new price targets for porsche, psa and renault we reiterate our sell rating on psa with a new 12-month price target of 2.70 (was 4.50), maintain our neutral rating on porsche with a new 12- month price target of 71 (was 68), and keep our neutral rating on renault with a new 12-month price target of 44 (was 50).,related research europe: automobiles: swollen inventories point to destocking: cutting our european production forecasts, october 19, 2012 global: automobiles: oem actions in europe inadequate for acceptable returns; prefer global players with scale, september 12, 2012 upcoming events 4th annual global goldman sachs autos conference, december 6-7, 2012. london,stefan burgstaller +44(20)7552-5784 goldman sachs international stephan puetter +44(20)7552-2919 goldman sachs international ashik kurian +44(20)7051-3084 goldman sachs international zia yusuf +44(20)7552-1289 goldman sachs international the goldman sachs group, inc.,goldman sachs does and seeks to do business with companies covered in its research reports. as a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. investors should consider this report as only a single factor in making their investment decision. for reg ac certification and other important disclosures, see the disclosure appendix, or go to /research/hedge.html. analysts employed by non- us affiliates are not registered/qualified as research analysts with finra in the u.s. global investment research,3,4,4,4,5,7,7,10,11,17,18,22,26,30,34,36,40,2,november 2, 2012 table of contents the european oems in six charts overview: resetting our ratings on european oems sharp european market deterioration grabs the headlines . . while global economic realignment is still a structural positive bifurcating business models drive performance execution deserves a premium in times of high uncertainty no big structural solution in europe for now reiterate our attractive coverage view summary investment views valuation performance and our estimates versus consenus bmw (bmwg.de): reiterate buy daimler (daign.de): off conviction list; remains buy fiat (fia.mi): off conviction buy list, down to neutral peugeot (peup.pa): reiterate sell porsche (pshg_p.de): maintain neutral renault (rena.pa): maintain neutral volkswagen (vowg_p.de): reiterate conviction buy appendix disclosure appendix,europe: automobiles 16 44 46,thanks to demian flowers for his major contribution to this report. prices in this report are based on the market close of october 31, 2012, unless otherwise stated. goldman sachs global investment research,2012e,2013e,2014e,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,jan2007,jan2008,jan2009,jan2010,jan2011,jan2012,jul2007,jul2008,jul2009,jul2010,jul2011,oct2007,oct2008,oct2009,oct2010,oct2011,jul2012,2012e,2013e,2014e,2015e,2016e,2017e,2018e,2019e,2020e,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,oct2012,apr2007,apr2008,apr2009,apr2010,apr2011,apr2012,3,november 2, 2012 the european oems in six charts exhibit 1: autos is the cheapest cyclical sector. cyclical sector p/e ratios general retailers support services travel and leisure general industrials industrial metals industrial transportation electronic and electrical equipment industrial engineering chemicals,europe: automobiles exhibit 2: .with german oems the bulk of market value segment weighting within euro stoxx auto and parts suppliers,construction and materials media forestry and paper aerospace and defence mining automobiles and parts,other oems,german oems,4,6,8,10,12,14,16,p/e,x,source: datastream exhibit 3: bifurcation in profitability. average ebit margin (%) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1%,source: bloomberg exhibit 4: .drives performance within the sector average share price performance (indexed) 160 140 120 100 80 60 40 20,german oems,other european oems,german oems sector relative,other european oems sector relative,source: company data, goldman sachs research estimates. exhibit 5: emerging markets continue to drive growth. global auto sales (mn) 120 100,source: company data, goldman sachs research estimates. exhibit 6: .with german oems positioned to benefit proportion of ebit from china (%) 25% 20%,80 15% 60,40 20 0,10% 5% 0%,bmw,daimler,vw,fiat,renault,psa,triad,emerging markets,% of ebit from china,source: company data, goldman sachs research estimates. goldman sachs global investment research,source: company data, goldman sachs research estimates.,jan-85,jan-86,jan-87,jan-88,jan-89,jan-90,jan-91,jan-92,jan-93,jan-94,jan-95,jan-96,jan-97,jan-98,jan-99,jan-00,jan-01,jan-02,jan-03,jan-04,jan-05,jan-06,jan-07,jan-08,jan-09,jan-10,jan-11,jan-12,4,november 2, 2012,europe: automobiles,overview: resetting our ratings on european oems sharp european market deterioration grabs the headlines . during the course of 2012, the european trading environment progressively deteriorated against the background of an ongoing european sovereign crisis as consumer confidence continued to weaken (exhibit 1). since the peak in 2007, after five consecutive years of decline, the western european car market is down 24% in unit sales terms. among the top five countries, spain is down 58%, italy 45%, the uk 18% and france 12%. so far, germany has been stable over the past five years, with car sales down only 1% to 2007 levels (exhibit 2). in total, we calculate the european market to have lost 4.5 mn units since 2007, assuming a 2,500 contribution per car, implying a 11 bn shortfall in fixed cost absorption.,exhibit 7: european car sales and consumer confidence units, k per annum,exhibit 8: european car sales decline by country change in units (%), 2007-2013e,1300 1250 1200,5 0 -5,0.0% -10.0%,-24%,-18%,-12%,-1%,1150 1100 1050,-10 -15,-20.0% -30.0%,-58%,-45%,1000 950,-20,-40.0%,-25 900,850 800,-30 -35,-50.0% -60.0%,12m trailing sales,europe consumer confidence (rhs),western europe,spain,italy uk 2007-2013e growth (%),france,germany,source: datastream.,source: acea, goldman sachs research estimates.,we forecast european capacity utilisation to drop to 73% in 2012 (from 80% in 2011); this leaves the industry well below historical levels to break even, and we have seen a sharp deterioration in european pricing. we expect a further drop in capacity utilisation in 2013, and therefore model additional pricing pressure of 150 bp in that year for european volume automotive makers. premium makers are not immune. bmw now talks about a 150 bp negative pricing impact, having expected to further recover net pricing by 150 bp at the start of the year. while premium makers continue to enjoy high capacity utilisation, their dealer networks, particularly in southern europe, are at a level of business where they require manufacturer support, adding pressure to premium automakers profitability. we model a 100 bp decline in net pricing for premium makers in 2012 and an additional 50 bp deterioration in 2013. . while global economic realignment is still a structural positive although the european “carmageddon” (as it has been termed by sergio marchionne) is capturing most of the headlines at the moment, we continue to expect global car sales to grow by 3.5% in 2012, 3.7% in 2013 and 5.1% in 2014. over this period, we forecast rather pedestrian market developments in the triad, with average growth of 2.1% pa over 2012-14. we forecast a 6% cagr in the us, -5% in japan and 0% in europe. the structural growth of automotive car sales in developing regions continues, with unit sales increasing 6% pa on average over the next three years, on our forecasts. we forecast bric countries to grow an average 6.6% pa, with row rising 3.5% pa. in total, we forecast global automotive car sales to increase 9% to 85 mn units in 2014 from 78 mn units in 2012. goldman sachs global investment research,1.,2.,5,november 2, 2012 exhibit 9: light vehicle sales forecasts sales (m units),europe: automobiles growth (%),2006,2007,2008,2009,2010,2011,2012e,2013e,2014e,2011,2012e,2013e,2014e,usa japan western europe passenger car germany (pc) france (pc) italy (pc) uk (pc) spain (pc) other (pc) light commercial vehicles eastern europe (ex russia) brazil russia india china china pass car china lcv asia (ex china/japan/india) o/w south korea row global global ex. china triad emerging markets brics rest of emerging market,16.6 5.6 16.7 14.8 3.3 2.1 2.4 2.4 1.6 3.0 2.0 2.5 1.8 1.9 1.5 6.7 4.3 2.4 3.4 1.2 9.4 66.2 59.5 38.9 27 12 15,16.2 5.2 16.9 14.8 3.0 2.1 2.5 2.4 1.6 3.1 2.1 2.8 2.4 2.6 1.7 8.0 5.3 2.7 3.6 1.2 10.2 69.5 61.5 38.2 31 15 17,13.2 4.9 15.4 13.5 2.9 2.1 2.2 2.1 1.2 3.0 1.9 2.8 2.7 3.0 1.7 8.6 5.7 2.9 3.6 1.2 10.1 66.0 57.4 33.6 32 16 16,10.4 4.5 15.0 13.5 3.6 2.3 2.2 2.0 1.0 2.4 1.5 1.9 3.0 1.5 2.1 12.9 8.6 4.3 3.6 1.4 8.7 63.8 50.9 30.0 33.8 20 14,11.6 4.9 14.5 12.8 2.8 2.3 2.0 2.0 1.0 2.8 1.6 2.0 3.3 1.9 2.7 17.0 11.7 5.3 4.4 1.5 10.1 72.5 55.4 30.9 41.5 25 17,12.8 4.1 14.4 12.7 3.0 2.2 1.8 1.9 0.8 2.9 1.7 2.2 3.4 2.7 3.0 17.6 12.6 4.9 4.6 1.5 10.8 75.6 58.0 31.3 44.2 27 18,14.3 4.6 13.1 11.6 3.0 2.0 1.5 2.0 0.7 2.5 1.5 2.1 3.6 2.9 3.0 18.8 13.9 5.0 4.7 1.5 11.0 78.2 59.4 32.1 46.1 28 18,15.5 4.3 12.7 11.2 3.0 1.9 1.4 2.0 0.7 2.4 1.5 2.2 3.8 2.9 3.1 20.1 14.9 5.2 5.0 1.6 11.5 81.1 61.0 32.5 48.6 30 19,16.0 4.2 13.2 11.6 3.1 2.0 1.5 2.0 0.7 2.4 1.6 2.4 4.0 3.1 3.5 21.6 16.1 5.5 5.2 1.6 12.1 85.2 63.6 33 52 32 20,10.3% -15.6% -0.3% -1.1% 9.2% -2.1% -9.5% -4.3% -17.8% 3.8% 6.2% 7.8% 2.9% 41.0% 9.0% 3.3% 8.3% -7.6% 5.3% 1.3% 6.2% 4.3% 4.6% 1% 7% 7% 6%,11.9% 13.0% -9.1% -8.7% -2.0% -12.0% -18.0% 2.0% -15.0% -13.0% -11.5% -3.5% 5.0% 9.0% 0.0% 7.0% 9.7% 0.2% 2.0% -1.5% 2.0% 3.5% 2.4% 2% 4% 6% 1%,8.4% -8.0% -3.0% -3.0% 0.0% -5.0% -4.0% 0.0% -2.0% -7.0% -3.0% 4.0% 5.0% -1.0% 5.0% 7.0% 7.6% 5.2% 5.0% 3.0% 5.0% 3.7% 2.7% 1% 5% 6% 5%,3.2% -1.2% 3.7% 3.4% 4.0% 5.0% 5.0% 2.0% 2.0% 2.0% 6.0% 6.5% 5.0% 6.5% 13.0% 7.2% 7.9% 5.2% 5.0% 2.5% 5.0% 5.1% 4.4% 3% 7% 7% 5%,source: ihs global insight, goldman sachs research estimates. bifurcating business models drive performance companies that are well positioned to benefit from structural trends are getting stronger, while weak or poorly positioned companies are seeing their relative competitive position continue to deteriorate. since the crisis in 2009, and as a direct consequence of the acceleration in developing market automotive sales growth, the european car industry has become a two-tier system: the german manufacturers are well positioned to take advantage of the acceleration in developing market sales growth in both the volume and premium segments. we expect the average ebit margin of bmw, daimler, and vw to increase from the low point of 5.3% in 2002 to 8.6% in 2014. (exhibit 4). the average margin over 2000-08 was 5.8%. in contrast, we forecast average margins of 8.0% over 2012-14. european-centric volume manufacturers, with insufficient global footprints or high dependency on cash generation located in europe, are experiencing a decline in both unit sales and net pricing. the average ebit margin of fiat (including chrysler), renault (including dacia) and psa has fallen from 3.6% in 2002 to 2.0% this year. (exhibit 10). the average margin over 2000-08 was 2.9%. in contrast, we forecast average margins of 2.6% over 2012-14. in other words, we have seen a bifurcation of business models not only in the broader european market, but also in the european automotive sector. peugeot now is the third- worst performing stock in the euro stoxx (sxxe): only banco popular and bankia have shown a weaker performance in 2012 to date. goldman sachs global investment research,2012e,2013e,2014e,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,jan2007,jan2008,jan2009,jan2010,jan2011,jan2012,jul2007,jul2008,jul2009,jul2010,jul2011,oct2007,oct2008,oct2009,oct2010,oct2011,jul2012,volkswagen,renault,daimler,fiat,volkswagen,fiatspa,peugeot,renault,daimler,bmw,peugeot,bmw,oct2012,apr2007,apr2008,apr2009,apr2010,apr2011,apr2012,6,november 2, 2012 exhibit 10: bifurcation in profitability between oems . average ebit margin 10% 9% 8% 7% 6% 5% 4% 3% 2% 1%,europe: automobiles exhibit 11: . which has been reflected in share price movements average share price performance 160 140 120 100 80 60,0% -1%,german oems,other european oems,40 20,german oems sector relative,other european oems sector relative,source: company data, goldman sachs research estimates.,source: company data, goldman sachs research estimates.,balance sheet risk can materialise quickly with the european operating environment continuing to deteriorate sharply, a lack of operational leverage and fixed cost cover, together with accelerating pricing pressure is resulting in significant cash burn at automotive companies. given the volatile macro environment most companies are facing over the next two years, we are wary of those with excess leverage to their enterprise value (exhibit 12). in addition, we believe that in these times of uncertainty, companies with negative free cash flows over the forecast 2012- 14 period will find it difficult to perform and will face significant risks to operational and fundamental progress (exhibit 13). both exhibits highlight the balance sheet risk to fiat and psa. given these risks, as well as the companies weak industry positioning (high volume end-market exposure), we assume an 11% fmcc (fair market cost of capital) for fiat, in contrast to the sector average of 9.3%. we value psa at a distressed trough valuation.,exhibit 12: fiat and psa the most levered among peers. net debt, market cap as % of ev 100% 80%,exhibit 13: .while attempting to stem cash burn free cash flow as % of market cap 10% 5%,60% 0% 40% -5% 20% -10% 0% -15% -20%,-40%,net debt &pension - % of ev,market cap-% of ev,-20%,2012-2014e average fcf/market cap (%),-69%,source: company data, goldman sachs research estimates. goldman sachs global investment research,source: company data, goldman sachs research estimates.,12msharepriceperformance,crocipercentile2012-14,7,november 2, 2012,europe: automobiles execution deserves a premium in times of high uncertainty industry positioning captures a companys opportunity set defined by access to structural growth and the industry attractiveness of its business segments. our gs sustain team has found that industry positioning is positively correlated with cash returns and that high return companies (i.e. better positioned companies) tend to outperform, benefiting from higher earnings upgrades on average, particularly in forecast year 2.,exhibit 14: industry positioning vs. croci,exhibit 15: consensus ebit change vs. share price perf.,100% 90%,leoni,volvo,nokian,50%,vw,80%,fiat industrial,bmw,25%,renault,continental,70% 60%,elringklinger,scania,-100%,-75%,-50%,-25%,daimler 0%,0%,bmw,25%,50%,autoliv,50%,vw,daimler,-25%,fiat,40%,valeo,man,30% 20%,fiat,michelin,pirelli,-50%,faurecia,psa,-75%,10% 0%,renault,peugeot,gkn,12m change in 2013e consensus ebit,0%,10%,20%,30%,40%,50%,60%,70%,80%,90%,100%,industry positioning percentile,source: company data, goldman sachs research estimates.,source: company data, goldman sachs research estimates.,however, in the automotive sector, we often find that execution is a third key variable that can determine relative share price performance. the best exam