Are We Nearing the Bottom of the Cycle? Bank of America Bets High on Auto Suppliers Amid Industry Revival

Auto suppliers Aptiv PLC APTV, BorgWarner Inc BWA, Gentex Corp GNTX, and Magna International, Inc MGA stocks are trading higher Thursday after B of A Securities analyst John Murphy upgraded the stock ratings.

Murphy upgraded Aptiv from Neutral to Buy and raised the price target from $130 to $140, BorgWarner from Neutral to Buy and boosted the price target from $54 to $67, Gentex from Underperform to Neutral and increased the price target from $26 to $33, and Magna International from Neutral to Buy and raised the price target from $65 to $85.

The analyst rolled forward his valuation basis to 2024 and adjusted price targets across his coverage. The price target boost increased for original equipment manufacturers (OEMs) and suppliers, while the analyst made only minor revisions for the dealers. 

Murphy also raised his price target for Tesla Inc TSLA from $225 to $300, which reflects the roll-forward to 2024 and adjustments to valuation multiples. He boosted price targets for General Motors Co GM to $72 from $70 and Ferrari N.V. RACE from €350 to €380.

Given the improving industry dynamics, the analyst took a more constructive view of suppliers. His supplier estimates are, on average, 5% - 10% above consensus over 2023 to 2025.

So far in 2023, volumes have exceeded expectations, particularly in the U.S., where fleet sales have been robust. Volumes in Europe have surprised to the upside, and while China remains slow, volumes have primarily been in line with expectations. 

Furthermore, raw material and freight costs have eased from highs, contributing to higher earnings near-term. Nonetheless, there is still a long way to go before optimal conditions are met in 2024-2026.

Given these improving dynamics, Murphy expects strong 2Q23 results and higher 2023 outlooks, specifically from suppliers. 

In addition, auto stocks have historically bottomed shortly before the trough in volumes and rose materially in the first few years of a volume recovery (often 5+ years). 

He believes the industry is marking the bottom of the cycle now, which means the timing is favorable.

Price Actions: APTV shares traded higher by 0.99% at $104.50 on the last check Thursday. BWA shares traded higher by 1.32% at $43.74, GNTX shares traded higher by 0.85% at $29.73, and MGA shares traded higher by 2.71% at $58.01.