Barclays Sounds 'All Clear' In U.S. Auto Stocks; Upgrades Industry

• While shares of Mobileye NV MBLY, Harman International Industries Inc./DE/ HAR and Johnson Controls Inc JCI are down since July 9, Visteon Corp VC shares have gained.
• Barclays’ Brian A. Johnson upgraded the US Auto sector from Negative to Neutral.
• Johnson said that there was increasing confidence that the China car market would not deteriorate as much as was previously feared.

Barclays had downgraded the US Auto sector in mid-July on concerns over a rapid decline in China auto sales and the expectation that investors would “panic” and sell auto stocks. Analyst Brian Johnson said, “At present we are growing increasingly more comfortable that the China car market will have a softer landing than we previously expected.”

Chinese passenger vehicle retail sales grew 2.9 percent in August, after declining 1.6 percent in June and 1.1 percent in July. Channel checks indicate flattish retail sales in September. Johnson expects flattish to low-single digit retail sales growth for the remainder of the year, in view of the channel checks and new government incentives for auto sales in China.

The Volkswagen emissions scandal is unlikely to have a severe impact on the overall European production trends, Johnson said, while adding that a rebound in auto production can be expected.

“We do see some company-specific impacts as the vehicle mix shifts away from diesel but at this point we believe the VW issue is unlikely to be an overhang on U.S. auto names overall,” the Barclays report stated.

Johnson believes that companies with Connected Car exposure would benefit in this environment. Mobileye, Harman International and Visteon are poised to benefit from “the above-average organic growth and margin moats afforded by their Connected Car exposure,” he wrote.

Johnson Controls is well positioned to benefit from “an acceleration away from diesels in Europe” as well as further restructuring. Barclays has an Overweight rating on Mobileye, Harman International, Visteon and Johnson Controls.