Morgan Stanley Double Upgrades American Axle, BorgWarner; Downgrades Magna, Delphi

The auto sector can be divided into two entities: Auto 1.0, the more traditional and legacy auto sector, and Auto 2.0, which includes shared, electric and autonomous vehicles, according to Morgan Stanley.

The Analyst

Morgan Stanley's team of analysts led by Armintas Sinkevicius, Adam Jonas and others oversaw the following rating changes:

• American Axle & Manufact. Holdings, Inc. AXL upgraded from Underweight to Overweight with a price target lifted from $16 to $21.
• BorgWarner Inc. BWA upgraded from Underweight to Overweight with a price target lifted from $40 to $61.
• Magna International Inc. (USA) MGA downgraded from Equal Weight to Underweight with an unchanged $52 price target.
• Delphi Technologies PLC DLPH downgraded from Overweight to Equal Weight with a price target lowered from $57 to $51.

The Thesis

The auto sector is undergoing a shift from Auto 1.0 to Auto 2.0, but the adoption is "highly nonlinear" and the steepest part of the curve will happen much later than the market is expecting, the analysts said in an industrywide report. Accordingly, investors can still profit from Auto 1.0 suppliers, whose lifeline will extend longer than expected, the analysts said. 

American Axle

American Axle's exposure to Auto 1.0 should position the company to have a "good year" in 2018, according to Morgan Stanley. While American Axle is the most-exposed supplier to a potential downturn in US SAAR, total car sales are likely fall less than 5 percent for 2018, the analysts said. The company can make up some of the difference from a higher mix of crossover, light truck and sports utility vehicles.

American Axle's guidance of more than $1.5 billion in free cash flow through 2020 represents nearly its entire market cap at current levels. Investors are "buying optionality that the business can generate free cash flow beyond that point," the report said.

BorgWarner

BorgWarner's fiscal 2018 guidance of organic sales growth of 5 to 7 percent and net sales of $10.52 billion to $10.69 billion is not only "achievable," but could be positively revised, according to Morgan Stanley. In fact, the analysts' EBITDA estimate already stands 3 percent above the consensus.

Related Link: Your Guide To Trading The Autonomous Vehicle Theme

Magna

Magna is particularly vulnerable to any macroeconomic downturn, as the company doesn't have any catalysts in the pipeline in the near term, the analysts said. Magna is unlikely to post any significant upside to estimates, especially since 2018 will be a "year of investment," the report said. 

Delphi Technologies

The bullish case for Delphi's stock was based on the belief it can be acquired, given the strategic value of its portfolio of power electronics, the analysts wrote. The company is now more likely to be an acquirer based on management's public comments that it can extract synergies from potential acquisitions, according to Morgan Stanley. A shift from diesel to gas in Western Europe is seen as a potential headwind to any positive estimate revisions.

Price Action

Shares of American Axle were trading higher by 2.86 percent Thursday afternoon. 

• Shares of BorgWarner were trading up 0.37 percent. 
• Shares of Magna International were trading lower by 3.33 percent. 
• Shares of Delphi Technologies were trading lower by 0.62 percent. 

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