UBS is initiating coverage on 13 US auto stocks, citing transformative forces shaping the sector, including electrification, software-enabled vehicles, and automated driving.
Legacy OEMs General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) received Buy ratings, with GM expected to weather challenges through cost-cutting measures and electric vehicle scaling.
Ford's earnings are anticipated to prove more resilient than initially perceived, driven by its Pro business.
Not all big automakers were so lucky. Tesla Inc (NASDAQ:TSLA) received a Neutral rating, with analysts awaiting a more favorable entry point, while electric vehicle Rivian Automotive Inc (NASDAQ:RIVN) also garnered a Neutral rating, expected to achieve positive gross margins in 2024 but facing larger volume challenges later in the decade, necessitating additional capital support.
Analysts noted that “the devil is in the contract details” for the original OEMs, but the analysts anticipate some level of wage and cost inflation, which is likely embedded in long-term outlooks. OEMs are expected to adapt and may find offsets, such as temporary supply shocks that could support new vehicle pricing.
The report cautions that an auto workers strike could result in short-term negative earnings revisions. While not explicitly included in their forecasts, the analysts have created an interactive strike model to evaluate various scenarios' potential impacts across their coverage.
Beyond labor negotiations, UBS is emphasizing a focus on Growth over Market (GoM) and margin improvement for auto suppliers, as well as profit sustainability for OEMs.
Suppliers' performance is closely tied to global vehicle production, with particular attention to idiosyncratic factors influencing their success. Analysts raised questions about supplier alignment with emerging players like Tesla and Chinese automakers, which may lead to substantial market share shifts in the coming decade. Furthermore, they highlight the importance of supplier alignment with industry shifts to ensure growth.
While sector margins are expected to improve with higher production volumes, analysts are tempering expectations about a return to prior peak levels due to associated costs, execution risks, and necessary investments. Nevertheless, recent market corrections are seen as a reflection of these mid-term challenges.