Baird On Autos: This Is A 'Correction,' Not 'Top Of The Cycle'

David Leiker, Baird's auto sector analyst, commented in a note on Wednesday that auto stocks are moving through the fifth in-cycle correction in 30-plus years. He added that if history is any indication, there may be another 10 percent downside, as past corrections typically saw a 27 percent average decline while the group is down only 22 percent from the recent peak.

"Importantly, when these corrections end the group averages 30 percent gains over six months," Leiker wrote. "With 5-10 percent downside relative to past corrections and potential 30 percent upside, the 3:1 upside-to-downside looks very attractive."

Leiker stated that his "call is simple," as auto supplier stocks outperform while auto sales rise. He continued that auto sales rise until income, employment and confidence decline as an economy heads towards a recession.

With that said, the analyst acknowledged that while China poses a risk to global growth, "nothing suggests a recession is likely for several years."

Related Link: What Will The Auto Industry Look LIke In 2015?

Top Investment Ideas

Leiker noted the following names represent his "top ideas" within the auto sector:

• Harman International Industries Inc./DE/ HAR's "strong booking" supports 15 percent revenue growth and 20-30 percent earnings per share growth through 2018.
• Mobileye NV MBLY is the "fastest-growing" auto company with "vision technologies" that will support rising penetration of autonomous driving technologies and next-generation safety features.
• Delphi Automotive PLC DLPH is expected to show "accelerating" organic growth as rising margins will deliver 15-20 percent earnings per share growth through 2018.
• Johnson Controls Inc JCI should see tailwinds emerge through year-end while its China risks "seem manageable."
Image Credit: Public Domain