More cautious on auto suppliers, Morgan Stanley analyst Armintas Sinkevicius lowered his price targets for Adient (ADNT), Aptiv (APTV), American Axle (AXL), BorgWarner (BWA), Delphi Technologies (DLPH), Goodyear Tire (GT), Lear (LEA), Magna (MGA) and Visteon (VC) by about 20% on average across the group after most of the U.S. auto suppliers lowered guidance for 2018. Noting that he sees risk to 2019 into the Detroit Auto Show in January, the analyst also downgraded Tenneco (TEN) to Underweight given its elevated leverage and limited free cash flow conversion in an “increasingly uncertain environment” for auto suppliers.
UNCERTAIN ENVIRONMENT FOR AUTO SUPPLIERS: In a research note to investors this morning, Morgan Stanley’s Sinkevicius lowered his price targets for Adient to $20 from $43, Aptiv to $72 from $81, American Axle to $18 from $22, BorgWarner to $55 from $61, Delphi Technologies to $20 from $30, Goodyear Tire to $22 from $23, Lear to $186 from $214, Magna to $44 from $48 and Visteon to $70 from $98. The analyst noted that third quarter results were “disappointing,” with most of the U.S. auto suppliers lowering guidance for 2018, largely due to lower production volumes in China and Europe. Management teams providing color commentary into 2019 cautioned about 1H19 and suggested global production in 2019 may be "flat to down," he added. Sinkevicius argued that there will be limited support for the stocks until there is more clarity around the environment in China and/or the guidance for 2019 is de-risked. Outside of China, the analyst has concerns around the sustainability of the U.S. auto and credit cycle and RDE in Europe starting September 1, 2019. Overall, Sinkevicius has a Cautious industry view on U.S. Autos and Shared Mobility sector nine-plus years into the U.S. auto and auto credit cycle. The analyst has Overweight ratings on American Axle, BorgWarner, and Lear, Equal Weight ratings on Delphi and Goodyear Tire, and Underweight ratings on Adient, Aptiv, Magna, and Visteon.
TENNECO CUT TO SELL-EQUIVALENT RATING: Morgan Stanley’s Sinkevicius also downgraded Tenneco to Underweight from Equal Weight and lowered his price target on the shares to $30 from $40 given its elevated leverage and limited free cash flow conversion in what he views as an increasingly uncertain environment for auto suppliers. He believes the stock is unlikely to be viewed more favorably by the market until the spin of the Aftermarket & Ride Performance business in late 2019, "at best." Further, the analyst argued that “there is no business at Powertrain Technologies for a full battery electric vehicle,” adding that this will continue to be an overhang for the stock.
PRICE ACTION: In morning trading, shares of Tenneco and Delphi are fractionally up to $33.73 and $17.25, respectively, while Adient’s stock has dropped over 1% to $24.16. Also higher, Aptiv and Magna have gained almost 1% to $75.60 and $49.77, respectively. Meanwhile, American Axle, BorgWarner and Goodyear Tire advanced about 3% each and Lear and Visteon are up about 2% apiece.