A quick glance at investing.com's "Top Daily Losers" list Friday showed the stocks of four U.S. automakers among the Top 5 losers Friday morning, with Rivian (RIVN) , Ford (F) and General Motors (GM) , all feeling the brunt of the continuing shellacking the market has been giving Tesla (TSLA) . Sharp-eyed web spiders noticed that Tesla, with zero fanfare, had initiated a round of massive price cuts overnight, including up to 20% for U.S versions of the Model Y.
I've spent more than a decade following auto companies for the sell-side and have for about 30 years been following the global auto industry in some way, shape or form, so I can explain this mess. I can distill the logic behind retail pricing of autos into one axiom: The market sets the price. That's it. Autos are consumer goods in which there is chronic overcapacity.
"Waiting for a deal," as a car buyer, is a strategy that almost always works. And now, whether you live in Beijing, Berlin or Burlingame, Elon is giving you a deal.
The global consumer is being shackled by the twin forces of slowing global economy -- which tends to reduce disposable income for purchase of any durable good, especially cars -- and higher interest rates, which increase the monthly cost of financing such a purchase. It is really very straightforward math.
So, the takeaway is clear: Don't own auto stocks in periods of rising interest rates coupled with slowing levels of economic growth. That is January 2023 in a nutshell.
The corollary to that axiom is that, in periods when the market is discounting the impacts that lower pricing will have on auto original equipment manufacturers' cost structures -- especially via gross margin -- car stocks actually become attractive short candidates. Oh, yeah, I have seen this movie before.
Those who "follow" TSLA on the sell-side actually have set Tesla's consensus earnings forecast to increase sequentially to $1.11 in the first quarter of 2023, from the current consensus earnings per share of $1.04 for the fourth quarter of 2022. Wait ... what? Elon just initiated a fire-sale for EVs, which his competitors will surely follow and earnings are going to grow through that? Add to that, the other factor of the extreme seasonality of Tesla's deliveries. Tesla clearly hews to the old Silicon Valley rubric of "stuff the channel" in every quarter and especially the fourth quarter of the year, and the first quarter starts looking really, really bad for Elon's EV play.
My detailed estimates for TSLA are only available in the proprietary research I publish for OHM Research in Sao Paulo, but let me lift the lid a bit here. I have Tesla delivering 320,000 units in the first quarter of 2023 vs. the 405,278 units Tesla delivered in the fourth quarter of 2022.
So how is TSLA going to produce sequential earnings growth when unit volumes are forecast (by me) to decline more than 20% sequentially? Short answer: They're not.
Three decades of experience have taught me that when Wall Street aims too high for EPS for a car stock ... you short it. Shorting TSLA was an enormous winner for my firm, Excelsior Capital Partners in 2022, and that position is working again today.
Some car marketing truths are self-evident, even in the fog of Musk-hagiography that surrounds Tesla. Price reductions should be (and usually are) a last resort for any auto OEM. That, coupled with the age and lack of diversity in Tesla's product line, makes the company much more vulnerable to demand destruction than its competition. So (continue to) trade accordingly.