Goldman On Auto-Related Stocks: Stay Constructive On Key Growth Names

Although auto companies are over-earning by an average of 27 percent, their stock valuations seem to already reflect this, Goldman Sachs’ Patrick Archambault said in a report. He added that most companies should be able to sustain their current dividends even in a recession scenario.

Harley-Davidson

Analyst Patrick Archambault downgraded Harley-Davidson Inc HOG from Buy to Neutral, while reducing the price target from $55 to $50. He mentioned that the company’s sales had continued to decline, even with FX normalizing and market share stabilizing. Dealer checks suggested foot traffic had been “mixed if not weak” during the first two months of 2Q.

In case, Harley-Davidson reports a decline in US registrations in 2Q16, it would mark the seventh straight quarter of y/y sales declines. Archambault added, “Concerns about long-term brand relevance, and demographic headwinds that we thought would be offset by the strength of the cyclical recovery could continue to take center stage once again, muddling the Buy thesis.”

Delphi Automotive

The analyst maintained a Buy rating for Delphi Automotive PLC DLPH, but removed the stock from the Americas Conviction List. He reduced the price target from $103 to $94, citing compression in target multiples.

Delphi announced a solid 2Q16 guidance. Archambault expects the company’s organic revenue growth to accelerate throughout the year from 6 percent in 1Q16 to 8 percent in 2Q16 and about 11 percent in 2H16. He added, “While investor positioning could keep volatility high, we believe the company still represents one of the best secular growth stories in our coverage.”

Recommending Selectivity

Archambault recommended staying selective in auto stocks. He said that although auto stocks had rebounded 16 percent from their January lows, investor expectations were “far from demanding.”

BorgWarner Inc. BWA and Harman International Industries Inc./DE/ HAR represented the “best value in discounted and dislocated growth names,” the analyst commented, while recommending investors to steer clear of dealers AutoNation, Inc. AN and Penske Automotive Group, Inc. PAG, given “an ex. growth SAAR environment and margin pressures.” He also advised against off-highway exposed stocks like Titan International Inc TWI.