Deutsche Bank Assumes Cautious Tone Over Auto Sector Heading Into Earnings

Rod Lache of Deutsche Bank released an earnings preview for autos and auto-part companies.

The Street has grown more "cautious" over auto manufacturers and auto-part suppliers and Lache does not expect the coming third-quarter earnings season to "allay" investors' concerns.

"Looking at the Global Auto Industry from the perspective of a U.S. Auto/Auto Parts Investor, the world appears to have become incrementally more challenging," Lache wrote. "South America has become very weak, China appears to be slowing, the prospects for growth in Europe appear to be modest, companies with Euro exposure face significant currency headwinds, and there are reasons to question the prospects for sustained growth and pricing discipline in the U.S."

According to Lache, U.S. auto pricing trends will come under further scrutiny in the near term and that consensus estimates could have additional downside. As an example, Lache notes that the current consensus for Ford Motor Company F does "not yet reflect the company's recent guidance." However, the auto manufacturers could deploy their "meaningful" free cash flow to minimize downside risk in share prices through increased regular dividends or special dividends.

Lache expects General Motors Company GM to report an earnings of $0.99 per share in the coming quarter. The analyst previously projected General Motors would earn $1.03 as the downward revision is due to weaker production in South America and "slightly softer share" in Europe.

Lache also lowered his estimates on Ford's earnings per share to $0.18 from $0.19 reflecting North American production coming in 25,000 units below previous estimates. The analyst notes that the current consensus estimate stands at $0.20, which does not reflect the weaker North American production.

Auto suppliers prospects for the third quarter "appear to vary significantly" given the individual company's ability to mitigate negative variances relative to investor expectations according to Lache, who maintains a belief that current consensus estimates are too high.

Dana Holding Corporation DAN is singled out as facing downside risk from its Off Highway and Latin American businesses while Delphi Automotive DLPH and American Axle & Manufact. Holdings, Inc. AXL will meet expectations.

BorgWarner Inc. BWA could exceed the analyst's expectations while Goodyear Tire & Rubber GT has an attractive setup heading in to 2015.