In Germany’s consumer discretionary sector, automobile investors are heading for the exits without waiting for analysts to confirm their suspicions that earnings growth is turning negative, causing sector forecasts to look worse than they would without autos.

Released: July 18 2012
Length: 3 Minutes

In this 3 minute video we drill down into the Thomson Reuters Germany Index using StarMine aggregates and uncover the discrepancies within the discretionary sector between the market and analyst estimates-and show you how to avoid this potential portfolio downfall.

Congratulations to those who invested in the S&P 500 five years ago – you are almost back to the break-even point. But in many countries outside the United States, investors remain underwater, including the strong man of the eurozone, Germany. An investor who put money into the German stocks five years ago is still sitting atop a loss of 20%.

What is going on within the Thomson Reuters Germany Index? Using StarMine aggregates, we discovered that one of the top performers in 2012 is the Thomson Reuters Germany Consumer Discretionary sector. Currently, analysts expect the sector’s earnings to grow by 6% over the next five years. But at the same time, the current market price signals that investors expect earnings to shrink by nearly 8% per year over the next five years. That’s the widest spread of its kind between market expectations and analyst forecasts seen in any of Germany’s ten economic sectors.

Digging down a bit further into this data, we discover the culprit as the automotive sector, where big gaps exist between analysts’ and the market’s views on future earnings growth. In the case of BMW (BMWG.DE), analysts expect earnings to grow a total of 6% over the next five years – but the market is pricing in negative compound annual growth of -10%. Turning to Daimler (DDAIF.PK), the gap is even more dramatic. Analysts are predicting a lower five-year growth rate in earnings of only slightly more than 4%. But the market-implied growth rate anticipates an even larger decline in earnings: the compound annual growth is now -15%.

Who is going to win this apparent tug of war? Analysts have been cutting their forecasts for both companies’ earnings for the current fiscal year. In the case of BMW, six analysts have reduced their estimates, while only one has revised his forecast and called for the automaker to report higher earnings. In the case of Daimler, ten analysts have revised their outlooks and cut earnings forecasts, while only one has become more bullish.

Clearly, investors aren’t waiting for analysts to act. They are taking their cash out of the car manufacturers’ stock and taking it to other parts of the market where they believe the fundamentals are stronger and where it will stand a better chance of generating returns – or at least, not losing. Even if it’s a case of moving to the sidelines, when it comes to the German automobile industry, investors may be making the right choice. And excluding auto makers, Germany’s consumer discretionary sector forecasts aren’t as bad as they seem.

 
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