Morgan Stanley autos analyst Adam Jonas is getting ahead of earnings season and looming economic slowdown, coming out with some cuts to profit forecasts and price targets.
“We have made material cuts to our earnings forecast, particularly in FY23 to reflect slower sales growth, deteriorating price/mix, and pressures on the auto credit complex (residuals, spread, provisions),” Jonas writes in a note to clients today. “This results in top line estimate cuts in the order of 5-10% across our coverage and EBITDA cuts in the order of 5-15%+, placing our forecasts 5-10%+ below consensus expectations.”
Key among the factors that weigh on Jonas and the Morgan Stanley team are a cut to its U.S. seasonally adjusted annual sales rate (SAAR) forecast of 1.5M units in 2022, another 1.5M unit cut in 2023, deterioration in car pricing from past peak comps, and auto credit woes resulting in lower residuals and lower spreads due to higher rates.
Jonas says the cuts could have been worse, but the fact that sales volumes are already down and car inventory has been “drained” means the automakers are now better positioned generally speaking versus past slowdowns. He cautions against auto industry companies like suppliers, dealers, and car rental chains due to rising input costs and ‘mean-reversion risk,’ meaning the good times for car rental chains charging higher prices might be coming to an end.
However, Jonas and the Morgan Stanley team are more “constructive” on names like GM (GM) and Ford (F) for a few reasons, but most notable is the market may not be fully valuing the automakers’ ICE (internal combustion engine) business.
“The market may also be undervaluing the run-off cash flows of the ICE portfolio which is going too far, in our view,” Jonas writes. “ICE will decline, but the decline will go far beyond end of decade and we believe can produce substantial cash flows in the process.”
Jonas’ comments echo what the industry has been hearing from CEOs like Carlos Tavares of Stellantis (STLA), and Oliver Zipse of BMW (BMW.DE). Both feel that while the industry is eventually going to shift to an EV future, there is plenty of time left for the ICE business to make money, offer customers cheaper modes of transport, and be more environmentally friendly in the process.
Shares of the automakers are all trading lower today, with the broader market down 1% in late-day trade. Tesla (TSLA) kicks off earnings season for the automakers, reporting after the bell on July 20.