Morgan Stanley: U.S. Auto Sector To Hit Profit Wall

The U.S. auto industry, faced with rising capacity and eroding customer credit quality, may be about to hit the wall in its current profit cycle, an analyst said Monday.

"This may be as good as it gets," Morgan Stanley's Adam Jonas said in a note cutting the U.S. auto industry to a Cautious rating.

With annual sales rates running near a record at around 17 million units, bullish investors are eyeballing whether that can rise still higher.

"Forgive our contrarian nature, but we want to head in the opposite direction," Jonas said. Car-makers are "pulling from future demand" with financing designed to offer the lowest possible monthly payments.

"Consumers buy cars like they buy housing," Jonas said. "There is a dark side to all this," Jonas said.

Despite a potential downturn in demand, automakers are busy spending big dollars to boost capacity. Jonas figures plans already in place for 2016 will see the industry's total manufacturing capacity 130 percent higher than just before the 2008 financial crisis.

Meanwhile in China, where U.S. autos sell at a handsome premium, the government is cracking down. In response to an antitrust campaign, Land Rover cut its prices 10 percent. Audi will cut spare-part prices 38 percent.

"We expect similar voluntary adjustments for GM and Ford products offered in China," Jonas said.

Jonas downgraded Ford Motor Company F to Underweight from Overweight, cutting his target from $17 to $16.

Jonas reiterated an Underweight rating on General Motors Company GM, cutting his target from $33 to $29.

Ford fell two percent Monday, while General Motors traded down 3.25 percent.