BofA Cautions Auto Investors After 'Too Fast And Furious Recovery'

Companies within the auto value chain reported "very good" third-quarter earnings, but the "too fast and furious recovery" implies investors should be more selective in their stock picking, according to BofA Securities.

The Auto Analyst: John Murphy made the following rating changes:

Adient PLC (NYSE: ADNT) double downgraded from Buy to Underperform with a price target lifted from $25 to $28.

Aptiv PLC (NYSE: APTV) double downgraded from Buy to Underperform with a price target lifted from $110 to $120.

Lear Corporation (NYSE: LEA) downgraded from Buy to Neutral with a price target lowered from $170 to $155.

KAR Auction Services Inc (NYSE: KAR) downgraded from Neutral to Underperform with a price target lowered from $22 to $20.

The Auto Thesis: The auto sector went through “the toughest shock in modern history” in early 2020 and followed up with a "heroic snapback in sales,” as recent U.S. seasonally adjusted annual rate sales are tracking at 16-million-plus, Murphy said in an industry-wide note. 

The industry has also recovered to flat year-over-year North American auto production and a very favorable but likely unsustainable price and mix.

The recent sharp recovery now puts into question the likelihood of sequential improvements heading into 2021, the analyst said. In fact, the industry could end up with a U-shaped or even a W-shaped recovery, he said.

Related Link: Wall Street Reacts To Ford's Strong Q3: 'Investors Are Getting Excited'

The auto industry won't see any new catalysts until early 2021, when companies are next set to report earnings, Murphy said. 

Until then, the uncertainty of positive or negative news flow in the coming months implies the potential for a tough environment for auto stocks, the analyst said. 

When companies do report earnings, many may prefer to offer a conservative outlook which "may not be great for stocks,” he said.

Price Action: Shares of Adient were down by 3.45% at $28 at last check Tuesday.

Shares of Aptiv were down slightly at $114.39. 

Shares of Lear were down slightly at $140.71. 

Shares of Kar Auction were lower by 7% at $17.34.