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Securian Financial

Auto sector update

Analyst insights

North American sales have remained resilient in 2019 and remain at healthy levels driven by the strong underlying U.S. economy (and consumer) and affordable gas prices. We believe profitability has been pressured by weak international results (primarily China) and higher commodity costs, though product mix (crossover sales) and looser financing terms have provided a partial offset. We expect headwinds to continue and volatility to remain high in the sector driven by concerns for global growth and ongoing trade wars (most recently Mexico). Longer term, we view the transformational risk as increasing due to the threat of electric vehicle (EV), autonomous vehicles and ride sharing.

Our Industry Assessment is supported by:

Level of Competition

The auto sector has large players with high barriers to entry, but pricing competition remains high (incentive spending is the rise) as companies fight for market share. Additionally, input costs have been trending higher. As such, margins have been under pressure the last few quarters.

Regulatory Environment

The current Administration is more accommodating towards auto companies as it relates to environmental standards. That said, we believe the longer term direction will likely be more restrictive as various environmental impacts are considered.

Activism

Cash flows have been under some pressure, but remain fairly balanced between capital returns.

Merger and Acquisition (M&A) Risk

The low M&A risk for original equipment manufacturers (OEMs) is offset by the ongoing strategic reviews in the high-yield and high-grade auto parts names.

Environmental, Social and Governance (ESG)/Transformational Risk

Long one of the main contributors to carbon emissions, the auto industry is undergoing a seismic shift in the production of vehicles. While the bulk of profits are still generated from traditional combustion engines, increasing amounts of capex are being redirected to EVs and mobility. Some notable, market-leading companies have provided aggressive production targets in an effort to trigger a broader, more rapid adoption. Key ESG Factors: Carbon and greenhouse gas emissions, fossil fuel dependence, climate change and renewable energy.

Position in Credit Cycle

Revenue growth has leveled off, but remains at very healthy levels. Concurrently, leverage has started to marginally increase.

Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. This commentary should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. The investment characteristics presented herein for each composite are subject to change. Investing involves many inherent risks, including the potential loss of the entire investment. Opinions expressed herein are those of Securian AM only, and only as of the date indicated.

This material may not be reproduced or distributed without the written permission of Securian Asset Management, Inc.

Securian Asset Management, Inc., is a subsidiary of Securian Financial Group, Inc.

For Institutional Investment Use Only.

DOFU 10-2019
976359