Weekly Auto Notes: Honda, GM, Ford Come Under The Regulatory Scanner

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Three auto companies were in the news this week for regulatory trouble. Honda Motors (NYSE:HMC) may be fined around $35 million for failing to disclose information regarding claims of injuries and casualties related to crashes in its vehicles. The company is reported to have failed to inform U.S. regulators about over 1,700 claims related to crashes in its vehicles since 2003. As a result, the Japanese auto maker is under investigation for violating the Transportation, Recall, Enhancement, Accountability and Documentation Act. The company said that these incidents went unreported due to a data entry error and incorrect interpretation of reporting requirements.

We estimate gross revenues of about $127.3 billion for Honda Motors in 2014, with EPS of $4.00, which is slightly higher than the market consensus of $2.23-3.09, compiled by Thomson Reuters. We currently have a $41 price estimate for Honda Motors, which is approximately 30% ahead of the current market price.

On the other hand, Ford Motor company was cleared of charges in an investigation by the National Highway Transmission Safety Administration (NHTSA) related to the rusting of heat shields in its vehicles. The agency had received complaints saying that the rusting could lead to dislocation of the heat shield and jam the steering shaft. The agency found that the rusting was extremely rare and that the company did not need to recall its vehicles in order to check them for the same problem.

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We estimate gross revenues of about $161.7 billion for Ford Motors in 2014, with EPS of $1.81, which is slightly higher than the market consensus of $1.04-1.20, compiled by Thomson Reuters. We currently have  a $20 price estimate for Ford Motors, which is approximately 30% ahead of the current market price.

General Motors came under scrutiny for similar issues. Some complaints about inadvertent braking in its Chevrolet Impala vehicles of the year 2014 were filed in police stations. The investigation by the NHTSA found that these errors arose not due to some mechanical or electrical problem with the vehicles themselves, but due to accidental mistakes made by the drivers.  However, the company did find fault with the parking brake software system, resulting in a recall of over 130,000 cars, including the Chevrolet Impala.

GM’s stock price stayed stable around the $32 mark this week. We maintain our ~$40 price estimate for GM, which is still about 25% above the current market price. We estimate revenues of about $167 billion for GM in calendar year 2014.

In other news, Tesla Motors has announced an agreement with German luxury car maker BMW to collaborate on battery and lightweight components. According to reports, the deal will bring into place an alliance that will involve the usage of Tesla’s battery technology and BMW’s carbon fiber technology in future vehicles. Tesla is also planning to setup a battery plant in Germany within the next 5-6 years. Earlier this year, Tesla was in discussions with BMW for the construction of charging stations for different types of electric vehicles. Tesla expects to save money through the adoption of BMW’s cost-efficient carbon fiber technology for the construction of car bodies in the future.

Currently, our valuation of $165 (market cap of $20.5 billion) for the company is about 30% below the current market price of $244 (market cap of $31 billion). We expect Tesla to report revenue of around $4 billion and operating income of $700 million for calendar year 2014. We forecast non-GAAP diluted EPS of $0.79, which is lower than the market consensus of $1.01 (Financial Times).

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