Inflation is raging and the Fed is tightening monetary policy, creating a cycle that might push the U.S. economy into a recession. That isn’t great news for car demand, or car stocks, but a lot has already been priced into the stocks of General Motors (
Ford Motor (F), and other auto makers already.
Chances of a U.S. recession are rising, with Wells Fargo economists now putting the odds at 30%. Typically, rising odds of a recession would put auto sales at risk. But there might not be much downside in auto volumes left, points out Wells Fargo automotive analyst Colin Langan. “Historically, autos sales are a leading indicator of a recession, as customers delay purchases as the economy softens,” wrote Langan in a Tuesday report. But auto volumes are already weak because of persistent semiconductor shortages that have constrained global vehicle production for more than a year.
“U.S. sales are already at recession levels,” added Langan. Light-vehicle sales in the fourth quarter of 2022 and the first quarter of 2021 at about 6.63 million units. That’s roughly 20% lower than volume over the same span in 2019, before the Covid-19 pandemic.
Langan doesn’t expect volumes to improve all that much in coming quarters. So he favors auto-supplier stocks that have more content growth per vehicle as well as strong backlogs of new business. His Buy-rated list includes
BorgWarner (ticker: BWA),
Adient (ADNT), and
Magna International (MGA). His top pick is BorgWarner.
Lagan also upgraded shares of higher-growth supplier
Aptiv (APTV) Tuesday, but only to Hold from Sell. His price target went to $112 from $108 a share.
Falling vehicle prices are the biggest risk he sees for Ford Motor (F) and
General Motors (GM). New- and used-car prices have been at or near records for months.
CarMax (KMX), for instance, reported a 40% year-over-year jump in its used-car pricing for its fiscal fourth quarter ended in February. “However, our recession analysis shows this is already reflected in [Ford and GM] valuations,” wrote Langan.
Coming into Tuesday trading, Ford and GM shares are down about 26% and 31% year to date, worse than the 7% and 6% comparable, respective declines of the
S&P 500 and
Dow Jones Industrial Average.
Langan still likes both stocks. He rates both GM and Ford at Buy with respective price targets of $72 and $25. At those prices, Ford and GM shares would be trading for about 11 and 10 times estimated 2023 earnings. Key to his bullish call is earnings estimates don’t come in that much if a recession develops.
His peers like GM best and are more cautious about BorgWarner and Ford stocks. Overall, 84% of analysts covering GM rate shares at Buy. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.
Only about 48% of analysts covering Ford rate shares at Buy. BorgWarner’s Buy-rating ratio is about 42%.
Write to Al Root at [email protected]