Morgan Stanley Cuts U.S. Auto Sales

Morgan Stanley cuts 2017 US auto industry sales forecast to 17.3M units from 18.3M units

In Q1 2017, 10.2 million vehicles were sold in the used market, a decrease of 1.3% versus the previous year

New Car Sales

The US auto industry has witnessed high demand for heavyweight vehicles in the past few years. In 2016, auto sales in the US were at their highest, with about 17.6 million vehicles sold during the year.

However, weakness in the first four months of 2017 also ignited the debate whether US auto sales have already peaked.  US Vehicle Sales at May reported at 16.96M, down from 17.21M last month and down from 17.52M one year ago. This is a change of -1.43% from last month and -3.16% from one year ago.

Used Autos

In Q1 2017, 10.2 million vehicles were sold in the used market, a decrease of 1.3% versus the previous year. Franchise used sales also showed a reduced number of units sold, with a 0.3% decrease versus 2016. Fewer consumers trading in their existing vehicle upon their new purchase could be sidestepping inventory from dealers. The average vehicle on American roads is nearly 12 years old.

The average retail used vehicle sold for $19,227 in Q1 2017, an increase of 2.1% year over year. This record-breaking high can partially be attributed to a higher mix of vehicles being sold that are only 3 years old or newer (53% of sales in Q1 2017) and these 3-year-old vehicles began with much higher MSRPs versus years prior. One caveat is that, while the MSRPs are up and so is the share, these vehicles aren’t retaining nearly as much value as before.

Cautious Comments

Morgan Stanley analyst Adam Jonas made “big” cuts to his US auto industry sales  forecast, reducing his 2017 US #SAAR forecast to 17.3M units from 18.3M units, 2018 to 16.4M units from 18.9M units, 2019 to 15M units from 19.2M units, and 2020 to 15M units from 18.7M units.

Jonas believes the auto cycle may be hitting a point of diminishing returns following 8 years into the biggest cycle on record as used car values erode, pressuring conditions for selling new vehicles, and said new vehicle inventory levels continue to rise.

Additionally, the analyst expects electrical margins to face increasing competition from new entrants and higher development costs.

#SAAR = seasonally adjusted annual rate

He lowered his price targets on 15 companies, cutting his targets for the following companies by 10% or more: Adient (ADNT), Ford (F), Group 1 Automotive (GPI). Specifically, he cut his target on Adient to $85 from $95, on Ford to $9 from $10, and on Group 1 Automotive to $53 from $60. Jonas kept an Overweight rating on Adient, and Underweight ratings on Ford and Group 1. LEAR: Jonas downgraded Lear to Underweight from Equal Weight and reduced its price target to $134 from $149. He expects Lear’s earnings to peak this year and to fall by 20% by 2021.

He also expects its Electrical business margins to disappoint investors due to higher development costs, increased competition, and potential lost market share.

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