Goldman Remains Cautious On Auto Sector, Says 'The Next Leg Is Down'

The U.S. auto cycle is currently held at a plateau after peaking in 2015, said Goldman Sachs analyst David Tamberrino. Increasing OEM incentives is the key reason the market has held at a plateau, according to the analyst.

“We believe this environment can hold through 2017, but we see a path to normalized US Seasonally adjusted annual rate beginning in 2018,” said Tamberrino.

Although overall production growth is expected to slow in the coming cycles, the analyst expressed upside potential in suppliers Delphi Automotive PLC DLPH, Harman International Industries Inc HAR and Goodyear Tire & Rubber Co GT.

The analyst expressed a number of both ratings and price target changes across the industry.

Related Link: Goldman Is Neutral On Detroit Automakers, Favors Ford Over GM

Suppliers

The analyst noted content growth in powertrain, electronics and exposure to autonomous vehicles as the reason for the positive rating.

The analyst noted late-cycle Growth at Reasonable Price (GARP) from connectivity and infotainment position.

The analyst noted “Defensive” tire replacement business, improved Free Cash Flow and possible growth in demand due to increased vehicles miles traveled (VMTs) and low gas prices.

The analyst cited underperformance in last 12 months amid NA operational inefficiencies. Once issues are solved, “bottom-line growth should accelerate.” Furthermore, the analyst sees a positive announcement on Magna Steyr, the company’s complete-vehicle-assembly business as a possible positive catalyst.

The analyst expects pullback and noted “elevated expectations, incremental competition, and shares above fair value.”

The analyst noted above average EBITDA and EPS growth, which is countered by below-average revenue growth, commoditized product offering and a fair valuation.

The analyst noted a share price in line with their price target and a “lower relative outperformance compared to peers.”

Related Link: Nomura Starts Coverage Of Ford, General Motors: "Put Your Hands Up For Detroit"

Automakers

The analyst noted capital deployment for mergers and acquisitions that could lead to a possible delay in launch of Model 3.

The analyst noted that end of the North American cycle is a concern and, despite an attractive dividend (5 percent), no upside potential is visible.

The analyst noted competition-induced pricing pressure and regulatory costs, and increased aluminum use to cut into profits.

Dealers

The analyst noted a company valuation reflective of their views and trading multiples at “historic troughs” that provides room for shares to be flat or slightly up in the near term.

The analyst noted investor skepticism and market headwinds from plateauing U.S. SAAR, weakness in U.S. oil patch, a complicated Brazil and “potentially complicated Brexit situation.”

Full ratings data available on Benzinga Pro.