Morgan Stanley analyst Adam Jonas sent shockwaves through the auto industry Wednesday, downgrading major automakers Ford, General Motors, and Rivian while simultaneously upgrading several franchise dealers. The firm’s revised outlook stems from a combination of factors Jonas believes are not fully reflected in the market’s current assessment.
Jonas downgraded Ford, General Motors, and Rivian, citing concerns about rising inventories, vehicle affordability challenges, increasing credit losses and delinquencies, and a slowdown in China’s automotive market. He noted that despite expectations for strategic changes like lower capital expenditures and potential mergers or partnerships to enhance efficiency, progress has been underwhelming.
Furthermore, Jonas expressed skepticism about the auto industry’s ability to benefit significantly from the Federal Reserve’s rate-cutting cycle. While rate cuts might offer temporary relief, they are unlikely to drive substantial outperformance. Historical data suggests that while U.S. auto stocks have outperformed in the six months following a rate cut, they tend to underperform in the subsequent six months.
On the other hand, Morgan Stanley is optimistic about the prospects of franchise dealers. The firm believes that the franchise dealer model is in the later stages of a mean reversion period compared to legacy automakers, which are currently experiencing peak earnings and facing growing headwinds. Franchise dealers, having proven resilient in managing costs and focusing on parts and services profits, are expected to benefit from the slower-than-expected adoption of electric vehicles, leading to a longer lifespan for internal combustion engine parts and increased demand for hybrid vehicles.
Jonas specifically highlighted that franchise dealers catering to higher-end consumers are more shielded from the broader deterioration in auto credit, making them a more attractive investment.
As a result of this analysis, Morgan Stanley upgraded Group 1 Automotive, Penske Automotive Group, AutoNation, Asbury Automotive Group, Lithia Motors, and Sonic Automotive, raising their price targets accordingly.
The downgraded automakers experienced significant share price drops following the announcement. Ford shares fell 4.46%, GM shares decreased by 5.51%, and Rivian shares declined by 6.42%.
This move by Morgan Stanley underscores the evolving dynamics within the auto industry, where the traditional landscape is being challenged by the rise of electric vehicles, changing consumer preferences, and macroeconomic uncertainty. It remains to be seen how these factors will shape the future of the automotive sector and whether the franchise dealers will indeed emerge as the winners in this shifting landscape.
