Credit Suisse Downgrades Ford To Underperform, Continues To Favor GM

Credit Suisse’s Dan Galves downgraded the rating for Ford Motor Company F from Neutral to Underperform, while maintaining the price target at $13. An Outperform rating was maintained for General Motors Company GM, with the price target at $38.

Volumes in the auto sector seem to have reached a peak in the US, analyst Dan Galves said. Investors are predicting only two scenarios:

1. flattish volumes with significant deterioration in pricing / margins for OEMs and suppliers, with an eventual cyclical decline
2. An outright decline in the near-term

Related Link: Buy Ford Over GM? This Analyst Says So After Looking At 2016 Picture

“Since late Q3, we’ve seen slight but noticeable deterioration in SAAR quality (slower ATP growth, higher incentives, rising inventories, slightly worse credit quality) that points to peaking volumes. It’s been primarily on the car side, but that can’t be discounted, given the difficulty of meaningfully adjusting near-term production mix,” Galves wrote.

The analyst expects catalysts to be negative in the near term. The industry may have to cope with:

1. Car pricing worsening to clear inventories
2. Negative news flow around production cuts
3. Downward revisions due to production cuts
4. Management teams selling personal shares or slowing down share buyback programs

Referring to Ford, Galves commented that its NA EBIT guidance seems to be at risk on “overly optimistic implied volumes” as well as a significant decline in global inventories, while material cost increases fully offsetting recent pricing/mix gains from new product launches in NA.

“We favor GM due to continued self-help costs savings, a favorable product cycle in '16/'17, very favorable inventory position in US, and a potential trough earnings scenario that should be less severe vs. F,” the Credit Suisse report added.