JP Morgan expects the last four months of 2022 to see an acceleration in global car production and said “the time has come" to own auto suppliers - but “selectively".
The broker raised its global car production estimate to 4% for full year 2022 from a previous estimate of -0.4% - on the back of a recovery in US, EU and China.
But JP Morgan trimmed its FY23 global production estimate from 7% to 6% as it believes China will face difficult comparatives in the second half of next year due to the dramatic growth trends in the next 6 months.
"Whilst macro uncertainties and potential gas shortages in Germany will pose challenges we think suppliers will still benefit from a) production recovery and b) strong pricing power leading to improved earnings,” analysts wrote.
Valeo, Stabilus, Schaeffler and Faurecia are its highest quality supplier overweight ratings and the broker expects large earnings upgrades for Renault (placing on Positive Catalyst Watch) and STLA consensus estimates (Bloomberg sourced).
The US bank also upgraded its stock recommendation on Novem to overweight and remained underweight on Michelin.
Global car production is set to rise 7% sequentially in second half of the year compared to the first half, Jose Asumendi, head of European autos at JP Morgan wrote.
This is due to better semiconductor availability, "strong pricing power across OEMs and suppliers and a very strong third quarter automotive earnings season with potential earnings upgrades across the industry.”
Production appears to be improving across Europe and North America.
As semiconductor supply eases, production will improve on average 4% across EU and NA in second half compared to first half despite macro, geopolitical concerns and consumer risks, said the analyst.
"We believe the risk lies more on the supplier side and less on OEMs,” said Asumendi.
“We don’t rule out production disruptions in Europe in latter 2022 or early 2023 but believe this should be seen as buying opportunities as these shortages will not be structural headwinds in the mid-term."
As a result, the time has come to own suppliers "but selectively”, JP Morgan told clients.
“We would argue the time has come to own suppliers as a) production is rebounding globally b) suppliers are passing on price increases to offset higher raw materials c) raw material inflation is starting to decelerate d) suppliers continue to outperform global car production e) supplier margins are bound to rerate sequentially having marked the trough level in the H1FY22 for years to come,” the bank said.