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Steer Clear of These 3 Auto Manufacturers Due to the Chip Shortage


The global automotive industry continues to suffer from a semiconductor chip shortage. The chip shortage is expected to be exacerbated as Malaysia plants will be closed until September 15, due to employees deaths from Covid-19.

According to AlixPartners, due to the chip shortage the auto industry is expected to lose $110 billion in revenue in 2021. Analysts estimate this bottleneck will end sometime in 2022, but chip maker Rohm Co. thinks it could last until 2023.

With that in mind, today I’ll take a look at auto manufacturers, Li Auto Inc. (LI), Toyota Motor Corporation (TM), and Ford Motor Company (F), which I believe should be avoided until chip manufacturing returns to more normal levels.

Li Auto Inc.

Li Auto Inc. is a company that designs, produces, and sells electric sport utility vehicles (“SUVs”) in China. The company currently offers its state-of-the-art SUV, Li ONE, which has many smart features and solutions.  

Year-to-Date, shares of Li Auto Inc. have gained around 7.5%.

Recent News 

On September 1st, Li Auto announced  an August delivery update. The company was able to deliver 9,433 Li ONE’s in August, which is an increase of 248% year-over-year and 9.8% on a month-over-month basis. 

Financial Overview 

In Q2, total revenue has risen about 159% year-over-year to $780.4 million. However, despite impressive revenue growth, the company’s net loss decreased by only 35% to $36.5 million on a year-over-year basis. As a result, the Non-GAAP loss per share stood at $0.01, missing Wall Street consensus by $0.01. 

In Q2, the company was able to improve its gross margin by 160 bps to 18.9%. However, it’s still significantly below the sector’s benchmark of 35.67%. 

Let’s also take a closer look at the company’s balance sheet. We can see that the company’s long-term borrowings have increased by about 10.9x to $861 million over the past two quarters. This means that more cash will be used to pay interest expenses in the future quarters, thus affecting its liquidity position. 

For the third quarter, the company plans to deliver 25,500 vehicles at the midpoint. However, because of a further increase in chip shortage, we think that LI could miss achieving this figure. Also, analysts expect no positive earning per share by the year-end despite double-digit revenue growth numbers. 

Finally, the company trades with a forward P/S and P/B of 8.48x and 5.30x, respectively. These ratios come well above industry median levels, suggesting that the stock is overvalued. 

Toyota Motor Corporation

Toyota Motor Corporation is a Japan-based car manufacturer that operates across automotive, financial services, and all other segments. The company offers a broad lineup of vehicles, including passenger vehicles, commercial vehicles, minivans, and others. 

Year-to-Date, shares of Toyota Motor Corporation have advanced 16.4%

Recent News 

On August 19th, Toyota said that it will shrink global output in September by 40% due to a chip shortage. The company closed 14 plants in Japan and abroad, leading to a monthly production shrink by about 360,000 vehicles. The company also recently reported that its U.S. sales were down 2% year-over-year in August.  

Financial Overview 

In Q1, Toyota’s revenue increased 72.6% on a year-over-year basis to 7.94 trillion yen ($73 billion). The company managed to beat Wall Street consensus estimates by 490 billion yen. TM reported a record net profit of 897.8 billion yen ($8.2 billion) versus its year-ago value of 158.8 billion yen. As a result, its GAAP EPS stood at 321.11 yen.

However, the company continues to be concerned about chip shortages and the rising prices of raw materials. Thus, analysts expect that its Q3 EPS could fall 10% year-over-year to 270 yen, while Q4 EPS will fall by 16.2% YoY to 233 yen. 

Finally, the company hasn’t changed its full-year guidance, creating some probability of an earning miss amid chip crunch. 

Ford Motor Company

Founded in 1903, Ford Motor Company is one of the most famous US-based vehicle manufacturers. The company currently offers a variety of Ford cars, trucks, EVs, sport utility, and Lincoln luxury vehicles across the globe. 

Since the beginning of the year, Ford shares are up about 47.3%

Recent News 

On August 26th, Ford announced a cut in production of its F-150 pickup truck because of chip shortage. The company said that its Kansas City plant will be closed during the week of August 30. Also, Ford will operate one of three shifts at the Dearborn plant. Besides, its plant in Oakville, Canada, will be temporarily closed as well. If the shortage continues, we may see a further decrease in Ford’s production, translating into lower revenues and earnings as a result.  

Brief Financial Overview 

On July 28th, the company announced second-quarter results which revealed Ford’s automotive revenue was up around 45.1% on a year-over-year basis to $24.12 billion, beating consensus by $1.29 billion. The company reported Non-GAAP EPS of $0.13, topping Wall Street projections by $0.09. 

In Q2, Ford achieved the highest quarterly income before taxes of $1.62 billion, up $1.08 billion from the year-prior period. However, the company’s net income decreased to $561 million from $1.12 billion as of 2Q2020 due to higher costs and expenses. 

Moreover, the company said that the semiconductor chip shortage could decrease its full-year earnings by $1 – $2.5 billion. As a result, analysts expect Ford’s EPS to stand at $0.28 and $0.31 in the third and fourth quarters, respectively. This implies a year-over-year decrease of about 56% and 9%, respectively.

Bearish options trades placed on Ford stock

We have also seen some bearish bets placed on the stock amid shortage concerns. So, let’s highlight some of them. The open interest levels for October 15th, $13.00 puts increased on Tuesday. According to barchart.com, the open contracts rose by 11,251 contracts to about 29,511. For the buyer of the $13.00 puts to earn a profit, the stock would need to plunge to around $12.39 by expiration date, implying approximately a 5% downside from Ford’s current price.

On September 8th, another options trader sold about 3,500 September 17th call options with a strike price of $13.50. For the seller of those calls to earn a premium, the stock would need to stay below $13.50 by the expiration date.

Oleksandr Pylypenko

Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. Oleksandr focuses his trade strategy around "special situations" (such as catalysts, potential acquisitions, or spin-offs) and how to make money from those catalysts, as direct stock purchases, combined with option-based approaches for risk minimization.

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