Nomura Starts Coverage Of Ford, General Motors: 'Put Your Hands Up For Detroit'

Global auto demand is expected to continue to grow around 2 percent annually in 2016 and 2017, Nomura’s Anindya Das said in a report. He initiated coverage of Ford Motor Company F with a Buy rating and of General Motors Company GM with a Neutral rating.

Auto sales in the US would likely remain at current levels, with the labor market continuing to improve. Das added that automakers in general should witness continued mix improvement due to consumer preference for SUVs over sedans.

Emerging markets are “at or near the bottom of the cycle, in our view,” Das stated, while adding that Europe is no longer considered a growth driver for global auto demand for the rest of 2016 and going into 2017.

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The Big 3

The Detroit Three have a foothold over the full-size pickup market. Although the U.S. full-size pickup truck market has “highly lucrative margins,” there is limited competition. Das mentioned three reasons for this:

• Customer loyalty
• U.S.-specific products being “difficult to integrate into a global, non-U.S. automaker’s existing product line-up”
• High import duties on light trucks

Ford

The analyst has a price target of $14 for Ford. He expects the company to retain its leading share of the highly lucrative U.S. pickup truck segment, which is expected to gradually benefit from the recovering housing market.

“The company is poised to remain competitive in the fast growing and popular crossover segment on the strength of its highly recognized Explorer, Edge, and Escape models,” the Nomura report stated.

Ford’s automotive finance business would likely continue to be a significant and steady source of profits, and the company’s cumulative earnings in automotive markets outside North America is expected to increase steadily.

Ford’s shares offer an attractive dividend yield, with steady FCF from the company’s North American operations and a strong automotive net cash position, which should support future payouts, Das commented.

General Motors

The analyst has a price target of $33 for General Motors. He mentioned that the U.S. pickup truck business was highly profitable and the company should not “suffer from any abrupt changes to its market share in this segment.”

Following its restructuring, General Motors has steadily built up its automotive finance business.

“This captive finance arm has been doing well and we see room for it to further increase its earning assets over the next couple of years,” Das said. He added, however, that there were downside risks to China’s automotive market in 2017, where the company has significant exposure through JVs.

“Furthermore, outside North America, the company has yet to break even in Europe on an annual basis, and its prospects for doing so in the near term are clouded by Brexit uncertainties. GM also faces comparatively weaker positioning in South America, where it steadily has been losing market share, especially in Brazil, the region’s largest market,” the Nomura report stated.

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