As the auto sector continues to face regulatory pressure and declining sales, one analyst is eyeing suppliers with caution.
Guggenheim analyst Ali Faghri initiated coverage on the following stocks:
Aptiv PLC (NYSE: APTV) with a Buy rating and $98 price target;
Gentex Corporation (NASDAQ: GNTX) with a Buy rating and $29 target;
BorgWarner Inc. (NYSE: BWA) with a Neutral rating;
Delphi Technologies PLC (NYSE: DLPH) with a Neutral rating;
Lear Corporation (NYSE: LEA) with a Neutral rating;
Visteon Corp (NASDAQ: VC) with a Neutral rating; and
Veoneer Inc (NYSE: VNE) with a Neutral rating.
Guggenheim’s broad caution is driven by a number of factors, the first of which is global cyclical pressure. Faghri forecasts two years of flat to negative production volumes, which could depress margins and hamper operating conditions.
“In particular, we believe Europe represents the most significant risk to the group’s outlook as our work suggests macro headwinds and disruptive emissions regulations will significantly impact vehicle demand in the region over the next few years,” the analyst wrote in a note.
He is further disenchanted by the slow rollout of secular trends, including connectivity, electric transportation, shared mobility and advanced driver-assistance systems.
“While there is a lot of excitement around these megatrends, our work shows that most of the larger content/growth opportunities (battery electric vehicles and autonomous vehicles) are unlikely to materialize over the next decade,” he wrote.
Aptiv, alone, appears positioned to profit from megatrends in the near term. It also provides exposure to stronger global markets.
Guggenheim expects auto suppliers to face significant regulatory pressure to boost investments in emissions-mitigating and safety technology, which will compound client pressure to reduce pricing.
“As a result, in this challenging backdrop we favor higher quality suppliers with content growth stories that can deliver mid-single digit or higher revenue growth,” Faghri wrote. This sentiment, coupled with favorable earnings outlooks, benefits Aptiv and Gentex.
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Photo courtesy of Aptiv.
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