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Auto Stocks' Indirect Exposure to War Uncertain

Although we expect some negative impact on our fair value estimates, we remain focused on long-term value.

As a percentage of revenue, direct exposure to the Ukraine crisis is probably very limited for the automotive stocks we cover, but indirect exposure is highly uncertain and has the market discounting these stocks. We think investors should remain focused on intrinsic value rather than near-term volatility. Our normalized midcycle assumptions are more important to intrinsic value and our fair value estimates than the near-term margin implications of the invasion. While it's likely there will be some negative impact on our fair value estimates, we see no reason to change our normalized midcycle assumptions. Even so, if we assumed zero sales in Russia for 2022, global light-vehicle demand would still be up 1% versus the 3% figure from which our forecast range of 1%-5% is built around. However, this does not adequately reflect the whole picture. Auto sector stocks are reacting to OEMs' announcements about temporary production shutdowns. Disruption of the supply of one key component can have a dramatic widespread effect. German supplier Leoni provides wire harness from two plants in Ukraine. This alone caused Volkswagen to halt production at eight plants, BMW to idle five plants, and Mercedes to reduce production at some European plants. Sanctions against Russia have several auto companies shutting down operations in the country. About 2% of global volume for BMW, Mercedes, Nissan, and Volkswagen is attributable to Russia. Stellantis is less than 1%. Renault, which owns Avtovaz (which makes Lada, the top Russian brand), has about 18% of global volume from Russia, but that volume only accounts for roughly 6% of Renault's revenue. Suppliers with direct exposure that we are aware of include Autoliv, Continental, and Magna. Also, Russia and Ukraine are major exporters of neon gas (for microchips) while Russia also exports palladium (catalytic converters) and nickel (lithium-ion batteries). The industry is scrambling for alternative supplies of parts and raw materials.

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