US Autos & Auto Technology | 2Q Earnings and 2023 Outlook Preview

The US auto suppliers are expected to deliver robust earnings in 2Q, with most companies meeting or exceeding consensus estimates. The latest IHS estimate indicates a YoY increase of +5% to 86.7 million units for the full year, while production volatility is expected to improve quarter over quarter. However, despite the improving volume environment, inflation from labor and energy continues to offset some benefits from unwinding freight and logistics costs among suppliers. Most suppliers are on track to meet their guidance for 2023, with some potentially raising them depending on the LVP trajectory and cost progression.

GM and Ford are expected to beat Q2 expectations due to strong consumer demand and limited pricing action. GM has already implemented a $2bn cost reduction plan earlier this year, giving it an advantage over Ford, which is expected to see improvement in its Pro and Blue as Model e losses. If current conditions hold, both GM and Ford may raise their full-year guidance. There is, however, still room for lingering uncertainties, particularly with the UAW negotiation happening between now and September. We maintain our Sell rating for Ford due to its valuation discrepancy with GM and potential risk to EV profitability targets.

The Detroit automakers and UAW have started contract negotiations before official expiration in mid-September, making the upcoming period a contentious one for the US auto industry. With a new Union leadership team in place and deep industry transformation towards EV, there is more uncertainty this year than in previous contracts, leading to a higher risk of work stoppage. In this context, we see room for OEM stocks to continue performing well into their upcoming earnings season. However, investors should be cautious as the stocks could see pronounced weakness in the weeks leading to September target naming and potentially additional softness in the case of a strike.

Both Tesla and Rivian reported much stronger than anticipated deliveries in 2Q, and are well-positioned to meet or exceed full-year volume targets. While improvements in gross margin will be driven by operating leverage from higher volume, mix and pricing, the transition to using LFP and in-house motors will also contribute. Investors will be watching for margin performance in the quarter to determine profit trajectory in 2H and heading into 2024. As for Rivian, the company could potentially exceed 50k units in production as supply chain constraints improve and as the company transitions to using the recently launched in-house Enduro unit for R1 and starting to fulfill R1S orders.