BofA: Global Environment Presents Challenges For Automotive Suppliers

Slowing car sales and uncertainty about global trade generally make Bank of America Merrill Lynch cautious on North American auto parts suppliers.

An expected drop in car sales volume will affect supplier earnings, analyst John Murphy said in a Jan. 17 note issued after the North American International Auto Show preview days. 

“Although many of the stocks … sold off meaningfully in 2018, we believe it is still a bit too early to step into auto stocks aggressively given current cycle timing, and what could be further negative earnings revisions,” the analyst said.

Some in the industry are calling for a plateau in the North American auto market in 2019, as opposed to the downturn projected by BofA. But Murphy said many company outlooks are vague — which he said could be a function of uncertainty about the broad global business environment and may mean the companies are being overly optimistic.

Autonomous Vehicles Overhyped? 

Earlier excitement about near-term prospects for commercialization of autonomous vehicle technology may be overdone, Murphy suggested, noting that AV talk was a bit more muted this year in Detroit.

Murphy updated his outlook for several automotive companies:

Adient PLC ADNT: BofA maintained a Neutral rating with a $22 price objective. Murphy is optimistic about what new CEO Doug DelGrosso brings to the job as a stabilizing force, but said market volatility and some lingering operational challenges combine with lowering volume and uncertainty around global trade to limit the stock’s upside.

Cooper Standard Holdings Inc. CPS: BofA maintained an Underperform rating with a $63 price objective, citing many of the same industrywide concerns. 

Dana Inc DAN: BofA maintained a Neutral rating with a $19 price objective for the drivetrain and temperature control system company.  

Ford Motor Company F: BofA maintained a Neutral rating on Ford with an $11 price objective. In addition to citing struggles to perform amid increased global economic volatility, Murphy said Ford appears to be behind competitors, particularly General Motors Company GM, on adopting new technology.

Lear Corporation LEA: BofA maintained an Underperform rating on the automotive systems and seating supplier with a $120 price objective.

Magna International Inc. MGA: BofA maintained a Buy rating on the Canadian auto parts maker with a $70 price objective.

Despite many of the global headwinds in the industry, Magna remains one of the best-positioned suppliers because of strong proprietary technology and solid reputation in the industry, Murphy said. 

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