Why Baird Is Still Bullish On Auto Stocks

Baird analysts remain buyers of auto stocks as the brokerage believes valuations discount a cyclical decline in demand whereas evidence points to stability (United States) or additional growth (Europe/China) around the world.

The August auto sales finished at 17.0-million-unit SAAR, slightly below 17.2-million-unit consensus but firmly within the 16.5–18.0-million-unit range observed for nearly two years. In terms of units, sales fell 4 percent on continued car weakness (-14 percent year-over-year) partially offset by strength in trucks (+4 percent year-over-year).

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Most of the U.S. automakers reported a drop in sales volume in August.

• General Motors Company GM reported 5 percent drop in sales.
• Ford Motor Company F suffered 8.4 percent fall in sales.
• Toyota Motor Corp (ADR) TM revealed 5 percent decline in sales.

On the other hand, sales of Fiat Chrysler Automobiles NV FCAU rose 3 percent.

"The US appears to be plateauing at very high levels which we believe can be sustained given current positive fundamentals," analyst David Leiker wrote in a note.

Meanwhile, the debate on U.S. autos and the state of the cycle has put pressure on supplier stocks.

"Instead of a scenario of either 'peak' or 'recession' with no in-between, performance in 2016 (and, for that matter, since late 2014) supports the market sustaining very high levels of demand given ongoing consumer health: employment, income, confidence, and credit availability all supportive," Leiker noted.

Leiker sees 2–3 percent global demand growth and content gains to support mid-single-digit organic revenue growth and double-digit earnings growth across the suppliers.

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