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Auto Sector in Shambles Amid Coronavirus: No Relief in Sight

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Coronavirus continues to spread around the world, with greater impacts every day. Confirmed cases of COVID-19 have exceeded 2 million on a worldwide basis, with the death toll crossing 134,000. The auto sector is in disarray due to factory shutdown, lower footfall at dealerships and supply chain disruptions. Amid the virus-led uncertainty, many auto firms have withdrawn annual guidance and are resorting to strategic cost-cut measures in a bid to preserve financial flexibility. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace. Let’s take a look at how coronavirus has led to a massive shakeout in the auto industry.

Extended Factory Closures

With the pandemic showing little signs of abatement, companies are left with no choice but to keep factories shut for extended durations. One of the latest auto biggies joining the slew of prolonged closures is Honda Motor HMC. Because of COVID-19 scare, the Japan-based auto giant  pushed back the restart of plants in Mexico through Apr 30. The company, which had put brakes on North American operations in March, recently extended shutdowns through May 1 in the United States and Canada. Honda currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Most of the automakers had halted U.S. production in mid-March, following the coronavirus outbreak. Car companies had initially expected to resume manufacturing in April. However, now that the pandemic has taken an ugly shape in the United States, production seems unlikely to start before May. Auto biggies including Toyota TM, Volvo, Nissan Motors and Fiat Chrysler FCAU have extended the suspension till April-end, in view of the massive spread of the disease. The suspension of production till April-end comes after President Donald Trump last week extended the guidelines aimed at containing the spread of coronavirus till Apr 30.

Amid the coronavirus rampage, Ford F has been forced to shutter the majority of operations across the globe since March. The company expects to freeze production at European plants to through at least May 4. As yet, it has not disclosed dates for resumption of operations. The firm expects a phased restart during the second quarter. Ford’s joint ventures in China are the only active auto operations of the firm currently, as the situation is stabilizing in the country. Top U.S. automaker General Motors GM has also not yet announced the resumption dates of its operations.

Recently, Toyota announced that it is extending shutdown at Brazil plants until June. General Motors plans to resume production in Brazil facilities in the same month. Other major automakers such as Fiat Chrysler and Volkswagen are yet to announce the dates of resuming production in Brazil. Although Brazil is South America’s top auto producer, most companies having operations therein have kept their plants closed.

After a month-long shutdown following the coronavirus outbreak, several of the world’s top carmakers are reopening plants in Europe. While companies like Toyota, Renault, Hyundai and Volvo are preparing to gradually resume operations, others including Jaguar Land Rover have pushed back plans to restart factories. Volkswagen VWAGY is planning to restart factories in Germany on Apr 27, about a week later than initially estimated.

Furloughs and Pay Cuts Galore

As COVID-19 has stifled vehicle demand and dimmed earnings prospects, automakers are now slashing salaries and in some cases furloughing employees without pay. Tesla TSLA is furloughing all non-essential employees and even implementing pay cuts through second quarter-end. Each of the Big 3 Detroit carmakers has announced salary cuts for white collar workers and senior executives. Honda and Nissan also recently announced that they would temporarily stop paying furloughed workers at U.S. plants. Other noted names in the industry like Meritor, Group 1 Automotive, Lithia Motors, Navistar, Penske Automotive, et al have also resorted to slashing costs through salary cuts or retrenchment of employees.

Dividends and Buybacks Called Off

Given the rising possibility of a recession in 2020, cash is the king for businesses. In this regard, many auto companies have suspended dividend payout and share repurchases to shore up their balance sheet, as they brace for a period of revenue slump amid the virus mayhem. Ford suspended its quarterly dividend of 15 cents per share without specifying the tenure of suspension. BMW has slashed dividend payout from 3.50 euros per share to 2.50 euros. Lear Corporation, Group 1 Automotive and BRP Inc., among others, have also suspended quarterly cash dividend until further notice to preserve financial flexibility.

With uncertainty over liquidity at the highest since the 2008 financial crisis, auto firms including AutoZone, CarMax, Lithia Motors, Group 1 Automotive and Genuine Parts and Lear Corporation have put their buyback programs on the back burner.

Annual View Withdrawn, Warnings Issued

Amid the coronavirus-induced uncertainty, most of the auto companies like Ford, General Motors, CNH Industrial, Cummins, Adient, Navistar, Magna International, American Axle, Superior Industries, Allison Transmission, Autoliv, Genuine Parts, Advance Auto and others have revoked 2020 guidance.

Volkswagen has warned that 2020 will be a tough year amid dwindling sales and supply chain distortion. The company finds it impossible to come up with a reliable 2020 guidance, as the COVID-19 outbreak poses serious operational and financial challenges. BMW also warned investors that the firm’s sales and profits will drop significantly in wake of the pandemic. The firm now expects automotive EBIT margin in the range of 2-4% compared with the prior view of 6-8%.

Just a couple of days back, Ford issued a warning about first-quarter results. The firm anticipates adjusted pretax loss of $600 million for the first quarter. The firm’s first-quarter sales will be affected by depressed demand for vehicles, thanks to the coronavirus outbreak. 

Challenges related to the virus outbreak will certainly impact the upcoming earnings cycle of auto companies. However, second and third-quarter earnings will be a litmus test for automakers, as these will determine the actual impact of the COVID-19 pandemic on the economy and the auto sector.

Last Words

The COVID-19 pandemic has resulted in unprecedented challenges for the auto sector, thereby creating a demand shock as consumers’ confidence has dropped significantly. Coronavirus-induced damage has been done much and the situation is unlikely to improve anytime soon. Given the rate at which the virus is spreading and the fact that customers are likely to put off spending on big-ticket discretionary items for quite some time, carmakers are unlikely to churn sizable profits for a while. Despite policymakers’ best efforts, companies are finding it difficult to stay afloat amid such trying times. Moreover, as the pandemic is showing up vulnerabilities on balance sheets of various auto firms, an auto industry bailout could be in the cards. Market watchers are extremely cautious about the industry’s outlook due to ambiguity associated with the spread and duration of the health hazard.

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Ford Motor Company (F) : Free Stock Analysis Report
 
Honda Motor Co., Ltd. (HMC) : Free Stock Analysis Report
 
Toyota Motor Corporation (TM) : Free Stock Analysis Report
 
General Motors Company (GM) : Free Stock Analysis Report
 
Tesla, Inc. (TSLA) : Free Stock Analysis Report
 
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
 
Volkswagen AG (VWAGY) : Free Stock Analysis Report
 
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