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Morgan Stanley Suggests Reducing U.S. Auto Exposure Amid Cyclical Peaks

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In a report published Tuesday, Morgan Stanley analyst Adam Jones said, "The very strong underlying North American results reported by both GM and Ford last week reinforce our view that now is a great time to reduce exposure to US auto names as we hover at cyclical peaks."

Jones noted that with U.S. SAAR reaching 17 million, the U.S. auto cycle has moved from a "need to buy" to an "I just want to buy" consumer mindset. Reading the noted, Jones may be trying to remind investors of the age old adage of "buy low, sell high."

Supporting his view, Jones provided a "few key thoughts" to consider about the sector including.

  • Clearly pulling forward demand - Jones noted the two most "under reported" and "unsettling" trends include extended loan maturities and inflated residual values. He explained this results in lower monthly payments, which provides the appearance of affordability.

    Jones commented, "Consumers buy cars like they buy houses - lower payment, bigger car."

  • Overdependence on China - Jones noted that Jaguar Land Rover (JLR) cut prices in China (estimated to be 50 percent of JLR's profit) by as much as 10 percent due to an antitrust campaign. Moreover, he said this was followed by price cut announcements from Audi and that similar cuts from GM (NYSE: GM) and Ford (NYSE: F) are likely.

Jones concluded by stating that he sees Tesla Motors (NASDAQ: TSLA) as the only car manufacturer with meaningful upside and named Magna International (NYSE: MGA) as the top pick in the sector.

Latest Ratings for TSLA

Oct 2017Morgan StanleyMaintainsEqual-WeightEqual-Weight
Oct 2017Standpoint ResearchDowngradesHoldSell
Oct 2017NomuraInitiates Coverage OnBuy

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