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Auto Stock Roundup: Fiat Chrysler-PSA Merger, Ford-UAW Deal & More

Zacks Equity Research

U.S. light-vehicle sales scaled up 2.5% year over year in October, with total sales coming in at 748,744. Japan’s auto biggie Honda Motor’s U.S. sales rose 7.6% year over year in the month, aided by higher deliveries of light trucks. Meanwhile, Japan’s largest car manufacturer Toyota Motor’s TM sales declined for the second month in a row amid soft car and truck deliveries. Nissan’s sales also dropped for the fourth time in the past five months. Conversely, Hyundai’s sales in the United States rose 7.60% year over year on the back of high demand for crossovers.

Fiat Chrysler FCAU and PSA Groupe officially announced their intention to merge and a binding MoU is expected to be reached in the coming weeks. In this era of sustainable mobility, such mergers are essential for the auto industry that is facing an expensive upheaval, in an attempt to shift away from fossil fuels toward battery EVs and autonomous technology.

Meanwhile, with General Motors’ GM workers approving the proposed labor contract to end the 40-day strike, United Automobile Workers (“UAW”) union bargainers have used it as a template for negotiations with Ford F as well. The union’s latest deal with Ford largely mirrors the UAW-General Motors contract, with certain exceptions.

(Read the Last Auto Stock Roundup here).

Recap of the Week’s Most Important Stories

1. Fiat Chrysler and France’s PSA Groupe recently announced their intention to merge in a 50-50 share swap. The board members of both the companies have approved the merger and binding MoU is expected to be reached in the coming weeks. The proposed tie-up between Italian-American automaker Fiat-Chrysler and PSA will lead to the creation of the world’s fourth-largest carmaker, with roughly $50 billion of market cap, $190 billion in annual turnover and 400,000 employees. The pact will bring about annual run-rate synergies of around $4.1 billion. Apart from financial and operational synergies, the deal will help the companies to solidity their positions in different markets. While Fiat Chrysler would aid PSA to achieve a long-sought presence in North America, the latter will help Fiat Chrysler to strengthen foothold in Europe. (Read more: Fiat Chrysler-PSA Mega Merger to Create Industry Behemoth)

2. Ford recently reached a tentative four-year labor contract with UAW, which would create or maintain jobs and involve billions in new investments by the U.S. auto biggie. The deal constitutes more than $6 billion of Ford's spending in jobs and plants. Under the new contract, more than 8,500 jobs will be created or retained, with 19 facilities receiving a portion of the investment. The largest investment of $1.1 billion would be in Ford’s Michigan Assembly plant for the all-new Ford Bronco SUV and Ford Ranger mid-size pickup. Full-time and temporary workers of Ford and UAW will receive $9,000 and $3,500 ratification bonus, respectively. Wage increase of 3% in the second and the fourth year each, and 4% lump sums will be provided in alternate years. Also, there will be no reduction in healthcare benefits or increase in members' costs. (Read more: Ford-UAW Deal to 'Create or Retain' Jobs & Make New Investments)

3. General Motors recalled more than 600,000 four-wheel drive trucks and SUVs as the braking system could get accidentally activated due to a software error, raising chances of a crash. Per the company, 653,370 vehicles worldwide were potentially affected but no accidents have been reported. The latest safety recall includes the 2014-2018 Chevrolet Silverado 1500, 2015-2020 Chevrolet Suburban, 2015-2020 Chevrolet Tahoe, 2014-2018 GMC Sierra 1500 and 2015-2020 GMC Yukon models. General Motors will reprogram the vehicles’ software free of charge. The braking software activation is triggered by the failure of a wheel-speed sensor, resulting in unintended braking on the opposite wheel, which would pull the vehicle to one side. (Read more: General Motors Recalls 600,000 Vehicles Amid Software Errors)

4. LKQ Corporation LKQ delivered a comprehensive beat in the third quarter of 2019, wherein it surpassed earnings and revenue estimates. The aftermarket auto parts distributor reported adjusted earnings of 61 cents per share, surpassing the Zacks Consensus Estimate of 57 cents. Higher-than-expected revenues from the North American segment led to the outperformance. The bottom line also increased 8.9% year over year. Third-quarter revenues came in at 3,147 million, outpacing the Zacks Consensus Estimate of $3,119 million. The top line also marginally increased from the year-ago level of $3,122.4 million. Bringing in pleasant news for investors, LKQ Corp announced plans to boost its share buyback program by an additional $500 million, raising the aggregate authorization to $1 billion. (Read more: LKQ Corp Beats on Q3 Earnings, Boosts Buyback Program)

5. BorgWarner Inc. BWA reported adjusted earnings of 96 cents per share for third-quarter 2019, beating the Zacks Consensus Estimate of 85 cents. This was mainly driven by revenue growth in the Drivetrain segment that amounted to $993 million, outpacing the Zacks Consensus Estimate of $964 million. However, earnings per share were lower than $1 recorded in the year-ago quarter. BorgWarner’s net sales inched up 0.6% year over year to $2.49 billion, which beat the Zacks Consensus Estimate of $2.38 billion. For full-year 2019, the company’s net organic sales are likely to be down 1% to flat, with an estimated range of $9.95-$10.1 billion. Further, it envisions adjusted net earnings between $3.85 and $4 per share. (Read more: BorgWarner's Q3 Earnings & Revenues Top Estimates)

Price Performance

The following table shows the price movement of some of the major auto players over the past week and six-month period.

In the past week, while Ford has gained the most, Harley-Davidson has registered the maximum loss. Meanwhile, in the past six months, Ford has declined the most while Tesla has registered the maximum gain.

 

Company

Last Week

Last 6 Months

GM

1.3%

0.6%

F

4.4%

-13.7%

TSLA

3.6%

33.4%

TM

0.9%

15.3%

HMC

0.9%

3.4%

HOG

-4.1%

6.4%

AAP

3.5%

7.1%

AZO

1.1%

15.5%

 

What’s Next in the Auto Space?

Investors are keenly awaiting third-quarter 2019 earnings of one of the leading auto parts retailer, Advance Auto Parts AAP. Watch out for the usual news releases over the next week.

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General Motors Company (GM) : Free Stock Analysis Report
 
Ford Motor Company (F) : Free Stock Analysis Report
 
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
 
Toyota Motor Corporation (TM) : Free Stock Analysis Report
 
Advance Auto Parts, Inc. (AAP) : Free Stock Analysis Report
 
BorgWarner Inc. (BWA) : Free Stock Analysis Report
 
LKQ Corporation (LKQ) : Free Stock Analysis Report
 
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