Citi Examines The Bear Case Against Ford And General Motors

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Citi issued a report Monday examining the bear case against Ford Motor Company F and General Motors Company GM.

Analyst Itay Michaeli commented, "While it’s not entirely clear to us what’s driven the most recent weakness, we thought it would be worthwhile re-examining the key points of the OEM bear case."

"Although the Yen is indeed a headwind, it's important to remember that it doesn’t materially encroach on Detroit 3 profit centers (trucks). That’s why GMNA was able to earn nearly a 10 percent adj. margin in Q3 even after allowing for share loss in cars," according to Michaeli.

"GM rationally gave up share in carryover car products and earned positive pricing from new HD pickups & SUVs while gaining share in half- ton pickups consistent with the product cycle trajectory. Ford also managed to hold Q3 variable profits by giving up car share and netting out positive price— 10.2 percent adj. margin," according to the report.

Related Link: Morgan Stanley: ‘Something’s Not Right’ At General Motors

Michaeli did not believe that, when it comes to pricing, "the consumer has overly stretched their auto wallets. But what about slippage in used car prices? This is something we’re watching closely, but it’s important to see the full picture. First, slippage in used car pricing isn’t a surprise, isn’t new (they peaked in early 2011) and likely reflects the changes in density we’ve written about for years. Second, the correlation between new and used car prices has been nonexistent for the past 3+ years."

The report also noted that "incoming capacity does not appear to materially encroach on Detroit 3 profit center segments (trucks), a segment that’s critical to our modeling of modest expansion at GMNA. Again, the environment to us looks fairly balanced and inconsistent with the return to ‘old ways" that automaker stocks appear to be pricing-in.

As for the bull case for North America, "it’s really more about sustainability of cash flows (at least for the next few years) then another step-function up in profitability."

The report forecasted that the "U.S. auto cycle will see continued pent-up demand for a few more years...as for pricing, the bull case merely calls for balance and a return to basics: reasonably negative pricing for aging (carryover) product and price gains from new (majors) product."

Citi maintained Buy ratings on Ford and GM and preferred GM. The price target for Ford was $18 and $48 for GM.

Ford closed Monday at $13.82, up 0.29 percent.

General Motors closed at $30.08, up 0.13 percent.

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Posted In: Analyst ColorReiterationAnalyst RatingsCitiItay Michaeli
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