The Frankfurt Motor Show opened its doors to the world's media on Tuesday to unveil 210 product premieres, more than ever, and upbeat executives are trying as usual to put on a brave face and project a positive image.
But beyond the veneer of optimism, worries abound, and it was not a good omen that the CEO of BMW (BAMXF) collapsed on stage at the beginning of the company's news conference and had to be taken to the hospital. The news conference was canceled, although company representatives said the CEO, 49-year-old Harald Krueger, was recovering well in hospital after having had a packed foreign travel schedule before the motor show.
Volkswagen (VLKAY), the world's second-largest automobile manufacturer, unveiled an electric Porsche that can run 500 miles on a single charge and takes only 15 minutes to charge up almost completely. The German company promised to unveil 20 battery-powered or hybrid cars over the next five years, which would raise its total range of ecological cars to 30.
At the show, Toyota (TM), the world's largest car company by sales, showcased another of its ecological Prius models -- but the electric car that most people wanted to see, Tesla's (TSLA) Model X SUV, will not make an appearance at the Frankfurt Motor Show, as the company has chosen to stay away.
The headwinds facing European carmakers are still stiff. Reuters reports how they started to rein in production, cut wages and reduce staff numbers and hours in China, as sales in the country fall because of the economic slowdown.
Other emerging markets are slowing sharply too, their sales in the U.S. aren't great, and they are being saved only by Europe's 11.5% year-on-year jump in car sales in August. All this makes bleak reading indeed, but investors taking a look at stock prices should probably see the glass half full: it seems most of the bad news is priced in, and it could be time to stalk these stocks for an entry point.
Take Volkswagen, which currently trades on a price-to-earnings ratio of 7.57 and on a forward PE of just 6.90. The carmaker derives only around 18% of its sales from Asia, less than the 20% it sells in Germany and half the 40% of sales that other countries in Europe represent. North America makes up 13% of Volkswagen's sales, while slowing Latin America represents 10%.
Of course, the jury is still out on whether Europe will be able to offset the slowdown in China so as to keep car sales growing at a pace that would still ensure robust earnings for carmakers. However, in the case of Volkswagen, analysts at German investment bank Berenberg argue that it is one of the most misunderstood companies in the auto sector.
That's because Volkswagen is seen as a producer of cars for the masses, whereas around 60% of the company's value actually comes from premium cars, which are less sensitive to cyclical downturns. The analysts calculate that Audi represents around 29% of that value, Porsche around 18%, Scania 10% and Bentley 2%. Those brands are doing well, especially Audi, which "has received a very strong model upswing with the new high-margin Q7, A4/A5, Q5 and Q1, all launched within the past year."
Or let's look at Daimler (DDAIF), trading on a PE of 9.85 or a forward PE of 9.59 looking 12 months ahead. Global Mercedes sales were up 15% in July compared with the same month last year, and the Berenberg analysts expect strong results when the company reports its third-quarter earnings on October 23. They believe the share price has 44% upside potential within a year.
For Daimler, the biggest markets are the U.S., which takes 20% of its sales, followed by Germany with 17% and China with just 10%.
China's slowdown could pose bigger problems for BMW, the eternal rival to Mercedes, as it is its biggest market, taking in around 19% of sales compared with the U.S. with 18% and Germany with 16%. Despite this, its stock doesn't look like a big bargain, trading on a current PE of 9.75 and forward PE of 9.02, just a little cheaper than Daimler's stock and pricier than Volkswagen's.
Analysts at Berenberg say the company is "structurally squeezed," noting that BMW cars had outsold Mercedes cars in every single quarter since 2011, but now sales at BMW are clearly slowing, having fallen by 2% in the second quarter.
The most sheltered European carmaker right now seems to be Fiat (FCAU), which has been recommended as a long position by analysts since last month. It has less exposure to China and emerging markets than other carmakers, and its fundamentals have improved, with sales growing by more than 20% in the second quarter this year.
The one factor that could benefit European carmakers will doubtless be the euro. If the single currency continues to weaken vs. major currencies and also vs. the currencies of emerging markets, these companies' sales are likely to surprise on the upside.
Investors should keep an eye on the U.S. Frederal Reserve's decision on interest rates later this week, since a hike will almost definitely weaken the euro. With valuations so depressed, European carmakers' stocks could turn out to be a good alternative for those seeking refuge from the Fed.