The firm says China has now flipped to a source of incremental supply and marginal loss Referring to a "butterfly effect," Morgan Stanley highlighted in a research note on Wednesday that China now produces 9 million more cars than it buys, upsetting the competitive balance in the West. The firm is cutting estimates on China price/mix and lost share, moving to the sidelines on Rivian (RIVN) and Ford (F), and downgrading General Motors (GM) to a Sell-equivalent rating. Morgan Stanley is more bearish on auto suppliers as well, but says it is less bearish on auto dealers, upgrading several names in the space.
U.S. AUTO INDUSTRY: Morgan Stanley is downgrading its U.S. auto industry view to In-Line from Attractive. At a high level, the downgrade is driven by a combination of international, domestic and strategic factors that the firm believes may not be fully appreciated by investors. U.S. inventories are on an upward slope with vehicle affordability still out of reach for many households. Credit losses and delinquencies continue to trend upward for less-than-prime consumers. Meanwhile, China's two-decade-long growth engine has not stalled; it has reversed in terms of China profits flipping to losses and China producing nearly 9M units more than it sells locally, a figure equal to 15% of non-China global volume, Morgan Stanley argues. Even if these units don't end up directly on U.S. shores, the "fungibility" of lost share and profit by key U.S. players "adds pressure here at home," it adds.
LIMITED COMPUTE PROGRESS: Morgan Stanley downgraded Rivian Automotive to Equal Weight from Overweight with a price target of $13, down from $16. The firm believes Rivian's ability to drive competitive compute progress in a financially prudent way is limited. Morgan's projections for Rivian's 2024 total capex and research and development of $1.3B and $1.7B, respectively, differ from Tesla's (TSLA) artificial intelligence spend "by almost an order of magnitude." It questions whether investors are ready to support a new computing capex cycle.
GREATER SHARE LOSS: Morgan Stanley downgraded Ford to Equal Weight from Overweight with a price target of $12, down from $16, and General Motors to Underweight from Equal Weight with a price target of $42, down from $47. Morgan Stanley cites expectations for greater share loss through the end of the decade, price/mix headwinds, and China risk for the downgrades of both Ford and GM.
MORE BEARISH AUTO SUPPLIER VIEW: Morgan Stanley downgraded Magna (MGA) to Equal Weight from Overweight with a price target of $43, down from $55, and Phinia (PHIN) to Equal Weight from Overweight with an unchanged price target of $50. The firm sees the ongoing cycle of negative revisions lasting into 2025, limiting opportunities for investors tempted to go "bottom fishing" for value.
LESS BEARISH DEALER VIEW: On the flip side, Morgan Stanley upgraded AutoNation (AN), Penske Automotive (PAG), and Group 1 Automotive (GPI) to Overweight, and Asbury Automotive (ABG), Lithia & Driveway (LAD), and Sonic Automotive (SAH) to Equal Weight. The firm believes its previous latent concerns about the franchise dealer business model have "proven largely mitigated" and it now sees greater risk in other pockets of its U.S. autos coverage. In that context, Morgan Stanley upgraded the franchise dealer complex with a positive multiple re-rating given that it sees greater risk in auto companies with entanglements to China, regulatory risk, EV investments, and calls on cash for compute and AI infrastructure.
TARGET CHANGES: Additionally, Morgan Stanley lowered the firm's price target on Overweight-rated Lear (LEA) to $145 from $150 and lowered the firm's price target on Underweight-rated Aptiv to $68 from $70. For most of the past two decades, China was a source of incremental demand and marginal profitability, supporting results for automaker OEMs and suppliers alike, but China has now flipped to a source of incremental supply and marginal loss, and is now becoming a force in the rest of the world, the firm tells investors.
PRICE ACTION: In afternoon trading, shares of Rivian and GM have dropped almost 5% each to $11.28 and $45.50, respectively, while Ford's stock has slipped about 4% to $10.45.
