Morgan Stanley Cuts CDK Global To Underweight, Notes 'A Long Road Ahead'

Morgan Stanley recently issued a report on CDK Global Inc (NASDAQ: CDK) after expectations of end market consolidation and limited international reach. Morgan Stanley downgraded CDK Global from Equal-weight to Underweight, while raising the price target from $45 to $46.

Analysts Brian Essex, Ivan Holman, and Brian Yun wrote, "CDK outperformed last year as several activist investors pushed for margin improvement, more efficient use of capital, and a greater focus on maximizing shareholder return...With promises now made for return of capital largely priced into the stock, we see elevated risk to upside driven by return on capital with execution and secular risk pressuring CDK's performance."

Morgan Stanley analysts highlighted three key points on why they believe CDK will have "a more challenging road ahead."

1. Consolidating markets

Analysts believe that a slower-growing marketplace that has already become highly penetrated could provide low growth opportunities for CDK Global.

2. Competition

Morgan Stanley sees CDK's competitors gaining strength in the digital marketing solutions space as new innovations may allow others to steal market share.

3. International Growth

Analysts at Morgan Stanley noted that growth outside the North American DMS market could be limited, which may hurt expectations of top-line growth in the near term.