Germany May Be Europe’s Achilles’ Heel in First-Quarter Earnings

Germany May Be Europe’s Achilles’ Heel in First-Quarter Earnings

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(Bloomberg) — A handful of top German industrials may prove the biggest drag on quarterly results in Europe in the coming weeks, an ominous sign for the country’s benchmark DAX Index as it hovers near a record high.

Carmakers BMW AG and Mercedes-Benz Group AG, chemicals giant BASF SE, drugs and crop chemicals maker Bayer AG and chipmaker Infineon Technologies AG are among seven Euro Stoxx 50 companies expected to drive a 7% drop in earnings per share for the index, excluding the energy sector, according to calculations by Bloomberg Intelligence. French drugmaker Sanofi SA and Dutch chip-making equipment suppler ASML Holding NV are also seen posting sharp declines.

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“Germany’s reliance on some key troubled industries, especially automobiles, is leaving it exposed to cyclical demand pressure globally on top of sluggish economic recovery domestically,” said BI Senior Associate Kaidi Meng.

Consensus shows Infineon’s adjusted EPS for the quarter ended March 31 falling 46%, amid a broader slump in demand from industrial customers. Shares of the supplier to Chinese electric-vehicle firms slid in March after Bloomberg reported that the government in Beijing had quietly asked EV makers to sharply increase their purchases from local chipmakers.

Investor concerns around this may be overblown as China’s semiconductor industry is still in development, Citi analyst Andrew Gardiner wrote in a note last month. But even though the trough may have been reached in the broader industry cycle, material signs of improvement have yet to emerge, throwing into question the company’s ability to meet its full-year guidance, Gardiner said.

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Meanwhile, a “worrying” slowdown in EV demand and “fierce” competition in China on pricing and technology point to a challenging 2024 for carmakers, according to Berenberg analyst Romain Gourvil. Mercedes and BMW are discounting heavily as pricing pressure grows, BI analyst Michael Dean said. 

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Raw material costs remain elevated for Bayer and BASF, according to BI’s Jason Miner. Bayer’s seed and crop chemicals businesses also face another weak quarter as farmers expect lower crop prices, while reduced construction activity due to high interest rates limits demand for BASF’s durable goods, Miner said. 

Bayer is also still working its way through mass litigation related to its Roundup weed killer, after setting aside as much as $16 billion two years ago to resolve more than 100,000 cases.

“If earnings continue to deteriorate, the DAX could lose some of its valuation support,” said BI’s Meng.

The DAX Index has rallied about 8% so far this year and reached a record on March 28.

—With assistance from Kwaku Gyasi.

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