Analysts at Morgan Stanley sparked a shakeup across auto stocks Wednesday as the firm moved to the sidelines on automakers and turned more positive on dealers and parts companies.
What Happened: Morgan Stanley analyst Adam Jonas downgraded Ford Motor Co
Jonas' more sour view of the auto industry landscape is being driven by a combination of factors he believes may not be fully understood by the market, including climbing inventories, vehicle affordability challenges, rising credit losses and delinquencies and growth slowdowns in China.
"In addition, our previous attractive industry view was supported by our expectation of significant strategic changes such as lower capex and potential consolidation (M&A/partnership) to improve capital efficiency. While there has been some modicum of progress, it has failed to meet our expectations," the Morgan Stanley analyst said in a new note to clients.
Jonas also noted Morgan Stanley had been optimistic about automakers getting a boost for being AI enablers, but that concerns about the significant capital requirements for AI development now counter thesis.
Finally, investors are looking for an opportunity in the market driven by the Federal Reserve's rate-cutting cycle, but although rate cuts can provide "temporary" relief for automakers, cuts are not likely to drive material outperformance, Jonas said.
The Morgan Stanley analyst highlighted data showing that although U.S. auto stocks have modestly outperformed on average in the six months following a rate cut, they have historically underperformed over the subsequent six-month period.
Ford Downgrade: Morgan Stanley downgraded Ford from Overweight to Equal-Weight and lowered the price target from $16 to $12.
Jonas expects Ford to suffer greater market share losses through the end of the decade. The analyst also anticipates pricing headwinds and regulatory compliance risk, which could hurt profitability. Jonas lowered his normalized earnings expectations by 15.1%.
Morgan Stanley has a bull case price target of $19 on Ford stock and a bear case price target of $6.
GM Downgrade: Morgan Stanley downgraded GM from Equal-Weight to Underweight and lowered the price target from $47 to $42.
Jonas sees a lot of the same headwinds in front of GM. He specifically pointed to China concerns as one of the main drivers of the downgrade. GM has significant exposure to the Chinese automakers through its joint ventures, the analyst said.
"In addition, we believe investors may not appreciate the potentially adverse impact that excess capacity in China has on other highly profitable regions in the global auto market," Jonas said.
Morgan Stanley lowered its normalized earnings estimates for GM by 16.4% but left its bull case price target of $62 and bear case price target of $28 unchanged.
Rivian Downgrade: Morgan Stanley downgraded Rivian from Overweight to Equal-Weight and lowered the price target from $16 to $13.
"The downgrade reflects our incorporation of the capital intensity of AV/ADAS which may be required to fulfill the technological underpinnings that attracted Volkswagen as a JV partner," Jonas said.
The Morgan Stanley analyst increased his annual capex estimates by $200 to $300 million per year beginning in 2026 as he waits for management to announce details around its joint venture cost structure.
Morgan Stanley's new price target of $13 consists of $10 per share in value for the automotive business and $3 per share in value for Rivian's software and services business. The firm has a bull case price target of $29 and a bear case target of $6.
Why It Matters: On the flip side, Morgan Stanley upgraded franchise dealers as the firm believes we are in the later innings of mean reversion in the franchise dealer model relative to legacy automakers who are just now going through peak earnings and are battling increased headwinds.
"We believe that our latent concerns about the franchise dealer business model (secular DTC bear case, mean reversion thesis) have proven largely mitigated and see greater risk in other pockets of our U.S. autos coverage," Jonas said.
Franchise dealers have proven to be pretty resilient by managing costs and focusing more on parts and services profits. Given the slower-than-expected EV adoption pace, these companies stand to benefit from a longer internal combustion engine parts tail and strength in hybrids, the analyst said.
Furthermore, many of the franchise dealers are more geared toward the higher-end consumer, which helps insulate the companies from a broader deterioration in auto credit relative to other areas of Morgan Stanley's coverage.
- Morgan Stanley upgraded Group 1 Automotive Inc
(GPI ) from Equal Weight to Overweight and raised the price target to $430. - Morgan Stanley upgraded Penske Automotive Group Inc
(PAG ) from Underweight to Overweight and raised the price target from $115 to $180. - Morgan Stanley upgraded AutoNation Inc
(AN ) from Equal-Weight to Overweight and raised the price target from $145 to $200. - Morgan Stanley upgraded Asbury Automotive Group, Inc.
(ABG ) from Underweight to Equal-Weight and raised the price target from $190 to $240. - Morgan Stanley upgraded Lithia Motors
(LAD ) from Underweight to Equal-Weight and raised the price target from $225 to $310. - Morgan Stanley upgraded Sonic Automotive
(SAH ) from Underweight to Equal-Weight and raised the price target from $40 to $58.
