Morgan Stanley Cuts U.S. Auto Sales Estimates, Says Sell Supplier Lear

Morgan Stanley significantly lowered its U.S. new car sales forecasts and longer term estimates for automobile makers, citing a variety of factors, including falling used auto prices and its belief that used car prices will drop sharply beginning in 2019. In conjunction with the note, Morgan Stanley analyst Adam Jonas cut his rating on auto supplier Lear (LEA) to Underweight, the firm's equivalent of a sell rating.

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NEGATIVE CATALYSTS: Tactics used by the auto sector to make new cars more attractive are lowering the prices of used cars, wrote Morgan Stanley's Jonas. That trend, in turn, is pressuring the sales of new cars, Jonas stated. Used car prices will drop further beginning in 2019, since they will start to become obsolete at that time as more new vehicles utilize electric engines and self-driving technology, according to Jonas.

ESTIMATE, TARGET CHANGES: Jonas cut his estimate of the 2017 U.S. seasonally adjusted annual rate of vehicle sales to 17.3M from 18.3M. He lowered his 2018 SAAR estimate to 16.4M from 18.9M and reduced both his 2019 and 2020 SAAR estimates to 15M, down from 19.2M and 18.7M, respectively. Jonas cut his estimates for automakers, dealers and suppliers by an average of 8.8% in 2018 and 13% in 2019. He lowered his price targets on 15 companies, cutting his targets for the following companies by 10% or more: Adient (ADNT), Ford (F), Group 1 Automotive (GPI). Specifically, he cut his target on Adient to $85 from $95, on Ford to $9 from $10, and on Group 1 Automotive to $53 from $60. Jonas kept an Overweight rating on Adient, and Underweight ratings on Ford and Group 1.

LEAR: As noted, Jonas downgraded Lear to Underweight from Equal Weight and reduced its price target to $134 from $149. He expects Lear's earnings to peak this year and to fall by 20% by 2021. He also expects its Electrical business margins to disappoint investors due to higher development costs, increased competition, and potential lost market share.

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