September 8, 2014
Autos & Auto-Related Autos & Auto-Related
Cutting US Autos to Cautious,
Downgrading Ford to UW
We think now is a great time to reduce exposure to
US auto names as the value of US SAAR (volume x
price) is setting new records. Easy credit and leasing
will no doubt push volume and mix to even higher
highs. Multiples should be lower, in our view.
What's Changed? What's Changed? From: From: To: To:
Autos & Auto-Related Autos & Auto-Related
Industry View In-Line Cautious
We see many signs that suggest OEMs are pulling forward US demand
from the future. The US auto industry has experienced a 70% boost in
volume in just 5 years. In our view, a release of pent-up demand has accounted
for most of the rebound. Going forward, we believe capacity, currency (Yen),
and credit will drive a grind to 18mm SAAR that, if not completely profitless,
may at least borrow too liberally from the future, compromising the sector
multiple. This translates to a poor risk-reward time for US autos.
Downgrading Ford to UW ($16 PT) and cutting GM (UW) PT to $29 from
$33. Given our view of the US cycle, we cannot recommend F and GM until
consensus fully appreciates the mounting pressure. US break-even SAAR is
over 14mm units when including price cuts. We see Tesla Motors as the only
US auto manufacturer stock offering any upside to fair value.
China, the industry´s brightest burning flame, is starting to flicker with
regulatory pressure. We believe the forensic investigation by the National
Development and Reform Commission (NDRC) can potentially correct an
over-earning situation for many auto companies in the world´s largest and
most profitable (for most foreign co´s and their JVs) market. See our global
auto team note: China Antitrust Investigation: Spotlight on Premium Profits,
Aug 26th, 2014.
With the downgrade of Ford, 15 out of the 27 stocks in our coverage
universe are now underweight, representing ~60% of the total market
cap. At a time when we expect GM and F multiples to contract as increased
lending pulls profit from future periods, we prefer high-growth names with
exposure to autonomous cars and advanced propulsion technologies. MBLY,
TSLA, DLPH, TRW, and BWA are the best ways to take advantage of the secular
trends in the auto industry, in our view. In addition to TSLA, we prefer the
Japanese OEMs, namely Honda and Mazda, which have more compelling risk-rewards than GM and F