We already knew the folks at Morgan Stanley weren’t fans of General Motors (GM). Now, whatever love they had for Ford Motor (F) is gone as well.
Reuters Morgan Stanley’s Adam Jonas and team explain why they downgraded Ford to Underweight from Overweight:
Given what we see are compounding risks to N. American industry profitability (a region where Ford generated nearly 130% of global auto pretax profit last year) we recommend investors reduce exposure to US OEMs who occupy the riskiest of all automotive verticals, bearing the brunt of competitive pressure as the cycle reaches full maturity…
And a risky truck changeover is where we see potential for a blind-side. In addition to the NA cyclical pressures discussed throughout this report, we also believe investor expectations are too high on the success of Ford's new 2015 F-150 pickup truck. It's not that we think the product itself won't be the most capable offering by the Detroit 3 (it better be!), but rather we expect margins on the new truck to be lower than the outgoing truck due to a combination of up-front costs and competitive reaction from Silverado/Sierra and Ram. We frequently talk with investors who claim Ford's new truck will be a game changer, but rarely hear any expectations for what GM and Chrysler will do to content and price in response. There will be a response. Loyalty in the pickup segment is very high. Lost share to Ford's new truck would take many years to win back, if it comes back at all.
Don’t think Jonas as any love for General Motors, however–he still rates it Underweight:
Following our downgrade of General Motors earlier this year to Underweight, we have made a few tweaks to our earnings model and valuation. Our 2015 and 2016 earnings forecasts of $3.98 and $4.01 remain well below consensus by a margin of 12% and 17% respectively. Like Ford, GM should demonstrate a material improvement in European profitability from cyclical lows. However, virtually every auto stock we cover globally will show fast improving results in Europe (i.e. you don´t need to own GM or Ford for Europe!). Moreover, if our prediction about N. American profitability going ex-growth comes to fruition, we believe a bounce in profit in international regions will do little to offset the impact. Notwithstanding the improvements made to each company over the past 6 years, GM and Ford are still overdependent on the N. American auto cycle.
Shares of General Motors have dropped 2.9% to $33.30 at 12:55 p.m., while Ford Motor has fallen 2.2% to $16.76.
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