Deutsche Bank Reviews The Auto Sector

Rod Lache of Deutsche Bank reviewed the auto sector in a note to clients on Wednesday.

Automakers: Q3 Results In-Line, Free Cash Flow In Focus

General Motors Company GM and Ford Motor Company F both issued third quarter results in line with Lache's expectations. The analyst notes that investments in the companies depend on sustainable free cash flow that can be returned to shareholders.

Ford offers a 10-percent free cash flow yield while General Motors' recalls and other headwinds pose challenges to its free cash flow.

According to Lache, upside in General Motors' shares is becoming more contingent on investors belief that the company's free cash flow is sustainable and can be meaningfully returned to shareholders. The analyst isn't convinced and notes that under a "best case scenario" a free cash flow inflection is two years away.

Tesla: Positioned To Lead

Tesla Motors Inc TSLA is best positioned to lead what Lache calls the "electrification revolution" despite a weaker than expected third quarter margin.

Looking beyond the third quarter, Lache believes the "electrification" theme will prove to be "larger than is widely perceived." The analyst sees electric vehicles reaching cost parity with conventional internal combustion vehicles in the early 2020s, hinting the technology is poised for mass adoption. Naturally, the analyst believes that Tesla is the company best positioned for significant advantages when mass adoption takes place.

Suppliers: Delphi Remains Top Pick

Lache names Delphi Automotive PLC DLPH as a top pick among suppliers. The analyst expects the company to experience organic growth of 4 percent to 5 percent in the fourth quarter, outperforming global production, which is expected to increase by only 2 percent.

Delphi's organic growth should continue in to 2015, according to Lache who adds that this warrants a higher multiple.

BorgWarner Inc BWA should benefit from fuel efficiency requirements which could drive double-digit growth through the end of the decade, according to Lache.

Analyst Ratings

Shares of BorgWarner are Buy rated with a $65 price target.

Shares of Delphi Automotive are Buy rated with a $92 price target.

Shares of Ford are Buy rated with a $16 price target.

Shares of General Motors are Hold rated with a $39 price target.

Shares of Tesla are Buy rated with a $310 price target.