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Investors focused on liquidity, balance sheets ahead of automakers' Q1 earnings

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Investors focused on liquidity, balance sheets ahead of automakers' Q1 earnings

Investors will likely pay extra attention to automakers' liquidity, balance sheets and coronavirus recovery plans in upcoming earnings reports to gauge companies' resilience during the pandemic in addition to the top-line and bottom-line results, experts said.

Major automakers including Ford Motor Co., General Motors Co., Fiat Chrysler Automobiles NV and Tesla Inc. are set to release results for the first quarter of 2020, the period when the companies started to shutter their production plants and saw crushed vehicle demand as consumers limited movement and spending.

Several automakers have cut forecasts and issued warnings for their future financial positions.

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U.S. auto sales dropped 12.7% year over year in the first quarter and experts believe sales in 2020 will decline by more than 25% compared to 2019.

Major automakers are striving to preserve cash during the ongoing crisis. General Motors on April 27 extended a $3.6 billion, three-year revolving credit agreement to April 2022 and suspended its quarterly cash dividend and share repurchase program. This was in addition to drawing down billions of dollars from open credit lines as other companies employ similar tactics.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Investors are more likely to pay attention to automakers' balance sheets and liquidity, even as companies detail potential plans to reopen shuttered operations. The metrics are key indicators of how companies can stay viable through the crisis and deal with the aftermath as plants reopen and consumers can resume shopping for new vehicles.

"Investors aren't worried about the specific earnings for the most part, more on the cash management and qualitative outlooks for the year given most quantitative formal guidance has been pulled," said Jeff Osborne, managing director and senior research analyst at Cowen and Co.

Ride-hailing companies Lyft Inc. and Uber Technologies Inc. are also due to report earnings in the coming weeks. A drop in demand has also hit the pair because the virus is keeping riders at home, but experts say the ride-hailing business model can survive the pandemic.

Focus on liquidity

Balance sheets are the "first and foremost" concern for investors at the moment, Osborne said in an email, especially following a wave of automotive bankruptcies during the 2008-2009 financial crisis.

Automakers are also investing billions of dollars in new technology, including electric and connected vehicles, and delays in those ventures would worry investors, Osborne said. Investors will also be listening to executives' comments on China as an indicator of what could happen in the U.S. as recovery plays out, he added.

Bill Selesky, senior research analyst with Argus Research, said investors' biggest concerns are company liquidity, restarting facilities and global GDP growth.

Investors are also concerned about automakers' position in 2021, when the initial shock of the pandemic is expected to have passed, Selesky said in an email.

Liquidity matters more now than it did at the end of the first quarter, Morgan Stanley analyst Adam Jonas wrote in an April 17 research note. The "earnings themselves may be the least meaningful to the direction of share prices as any of the roughly 100 earnings seasons I've ever seen in my career on Wall Street," Jonas said.

Although companies might not provide 2020 guidance as the crisis evolves, Jonas said automakers should be prepared to answer questions about burn rate in a full shutdown scenario, along with covenants and how the company is thinking about new liquidity in an extended near-shut-down scenario.

Investors will also be paying attention to executive comments concerning the resumption of auto production, auto sales, and post-pandemic consequences, Jonas wrote.

Cowen and Co.'s Osborne expects longer production shutdowns and slower recoveries for the rest of 2020. The analyst forecast global production declines of 22% in 2020 with a 14.4% rise in 2021, according to an April 22 research note.

U.S. light-vehicle sales are forecast to drop 26.6% year over year to 12.5 million units in 2020, according to IHS Markit.

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Jonas said the path to restarting auto production is more complicated than just "flipping a switch." Investors will value permanent changes in automakers' business models, Jonas said, including consumer behavior, digitization, supply chain restructuring, cash and working capital practices.

GM, Ford and Fiat Chrysler halted North American production in mid-March as the United Auto Workers union pushed for worker safety and demand for vehicles dropped. The three automakers are reportedly in talks with the union about safety measures as they prepare to resume some manufacturing operations in the U.S. in early May. The UAW said April 23, however, that the scientific data about the pandemic is not conclusive enough to have union members return to work.

"We strongly suggest to our companies in all sectors that an early May date is too soon and too risky to our members, their families and their communities," the UAW said in a statement.

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Bright view of Tesla as pandemic changes outlooks

The pandemic has hit automakers' financial forecasts particularly hard, causing many to withdraw their earnings expectations for the year.

But there is "clear optimism" surrounding Tesla from Wall Street bulls after the company reported better-than-expected first-quarter delivery numbers, Wedbush analyst Dan Ives said in an April 27 research note. The electric-car maker has announced furloughs and salary cuts to offset impacts from the pandemic.

Ives said it may be impossible for Tesla to hit its original 500,000-delivery threshold for 2020. The analyst expects about 400,000 deliveries instead. Tesla did not respond to a request for comment.

Morgan Stanley's Jonas said Tesla investors are focused on the company's full-year unit guidance and first-quarter cash burn. The analyst expects Tesla to lower its full-year unit guidance even though the automaker usually keeps "aspirational full-year targets," according to an April 27 note. Investors could react positively to the move as it gives more confidence for a potential demand recovery in the second half of 2020.

Ford, which withdrew its guidance in March, expects a $600 million loss in first-quarter adjusted EBIT because of ongoing disruptions from the pandemic. Ford is set to report earnings April 28. The company has borrowed $15.4 billion against two lines of credit.

General Motors also withdrew its 2020 guidance because of uncertainty caused by the pandemic. The Detroit carmaker previously announced plans to draw down about $16 billion from its revolving credit facilities. GM is set to report earnings May 6.

Italian-American Fiat Chrysler had not announced any guidance changes but said it drew down its €6.25 billion revolving credit facility, in addition to the €1.5 billion the company has drawn down from other bilateral credit facilities.

Ford, General Motors and Fiat Chrysler did not respond to requests for comment.

Impact on ride-hailing companies

Lyft, which is set to report earnings May 6, withdrew its annual revenue and adjusted EBITDA guidance because of "the evolving and unpredictable effects of COVID-19," referring to the disease caused by the new coronavirus.

Ride-hailing rival Uber, set to report May 7, also withdrew its 2020 guidance for gross bookings, adjusted net revenue and adjusted EBITDA because of the uncertainty stemming from the ongoing pandemic. Uber also expects to write down up to $2.2 billion in the first quarter because of investment impairments.

Ride-hailing has been virtually halted by stay-at-home orders, Wedbush's Ives said, but Uber's food-delivery service has turned into a major revenue driver for the company. Uber Eats, previously weighing down Uber's successful ride-hailing business, is among the delivery services seeing an uptick in use as consumers rely on to-go services because many restaurant dining rooms are closed.

The San Francisco-based company said the financial assistance program is expected to reduce its GAAP revenue by $17 million to $22 million in the first quarter and by $60 million to $80 million in the second quarter.

However, Ives said the hit taken from the assistance program and the impairment charge is "less than feared" by Wall Street.

The ride-hailing business model can survive the pandemic and potential impending recession, Ives said.

Lyft and Uber did not respond to requests for comment.