Can Toyota’s share price outdrive Ford, General Motors and Fiat Chrysler?

The auto sector, like many others, is not proving immune to the havoc caused by COVID-19. Will manufacturers such as Ford, General Motors and Fiat Chrysler be able to survive, or will Toyota’s [TM] fundamentals help drive the firm’s share price?

Reduced demand due to the growing impact of coronavirus as well as pressure from unions over the safety of staff are impacting US giants Ford [F], General Motors [GM] and Fiat Chrysler [FCAU], driving company share prices down as a result.

Car sales in China collapsed in February, falling 79.1% from the same period last year based on information from the China Association of Automobile Manufacturers, according to TheWall Street Journal. In the country just 310,000 vehicles were sold last month.

RBC Capital Markets has meanwhile suggested that global auto production could drop by as much as 16% in 2020, CNBC reports, due to the falling demand in China and in the US. The firm forecasts that US sales could fall 20% in 2020 compared to last year’s total — a reduction to 13.5 million vehicles compared to a previously anticipated 16.5 million to 17 million.

Ford, Fiat Chrysler and General Motors have already seen their share prices gradually decline over recent years and in March the stocks were hit further, plummeting 38.6%, 44.3% and 49% respectively as of 18 March.

One car manufacturer that appears to be bucking that trend is Toyota [TM], which saw its share price climb throughout 2019 before plummeting in early 2020. Despite still seeing a decline in its share price in March, at 11% this is considerably less dramatic than its counterparts.

As fears of a global recession begin to sink in, what can these ailing automotive companies do about falling sales and production to boost their dragging share prices?

Building pressure from unions

At the start of this week (16 March), Fiat Chrysler announced that its subsidiaries — FCA Italy and Maserati — would be suspending production “across the majority of their European manufacturing plants” through to 27 March in response to the COVID-19 outbreak in Europe.

Further to this, Ford, Daimler [DAI.DE], Nissan [7201.TYO], Volkswagen [VOW.DE] and other major manufacturers announced they would be shutting down their European operations on 17 March, the New York Times reported.

On the same day, the United Auto Works union announced that it had been in discussions with the “big 3 automakers” — Fiat Chrysler, Ford and GM — over protecting workers during the ongoing health crisis.

It stated that all three companies had agreed to “review and implement the rotating partial shutdown of facilities, extensive deep cleaning of facility and equipment shifts, extended periods between shifts, and extensive plans to avoid member contact”.

The companies had previously began implementing measures to help flagging sales, with several automakers announcing earlier in the week that individuals buying a new car would be able to defer payments, while existing customers could ask for payments to be rescheduled, according to Reuters.

“We are working with customers on a case-by-case basis regarding payment deferrals and waiving late fees,” a GM spokesperson told the news site.

What the analysts think

Among analysts polled by CNN, the consensus rating for Toyota, Fiat Chrysler and GM is to buy the share price, while the consensus for Ford is to hold. Among these stocks, the 12-month share price forecast for Fiat Chrysler represents the largest uptick — 170% as of 18 March — whereas Toyota’s median price target of $158.63, indicates a 36% uptick, and thus provides the least potential for share price gains.

According to Doron Levin, writing in Seeking Alpha, the sales slump in China, key markets for both Ford and GM will have a tremendous effect. He notes that sales for GM were down 92%, while Toyota also saw sales down 70%.

If there is a dramatic drop in production — he points to Morgan Stanley figures that suggest as much as a 90% fall — then Levin thinks that “free cash flow burn could be in the order of $4bn a month for each Ford and GM”. This would jeopardise reserves “within ten and nine months respectively”.

Toyota, he suggests, could have the upper hand. He says the company has “showed discipline in weak periods” in the past, noting that the company also has the strongest balance sheet, as well as the highest credit rating, among its fellow automakers.

“We are just at the beginning of the latest severe test for the global automotive industry. It's a reasonable assumption that not all producers will survive in their current form,” Levin concluded.

“We are just at the beginning of the latest severe test for the global automotive industry. It's a reasonable assumption that not all producers will survive in their current form” - Doron Levin