Goldman Sachs: Auto Stocks to Correct Down With Recession

The brains analyzing the U.S. economy at Goldman Sachs are now forecasting a recession for the United States in 2008 and Goldman auto analyst Robert Barry says auto stocks will correct down with it. Weakness in the housing market have left consumers with less equity to borrow against to finance a vehicle. Credit is tightening. And general uncertainty is making buyers jittery.

The analyst cut his price estimates and price targets on all the auto stocks he covers, including Magna International Inc. (MGA), which he says will see its North American product revenue fall US$758-million this year and profit margins decline. He rates Magna a “sell” with a new six-month price target of US$75, down from a previous target of US$90.

“We see an average of 11% upside to all of our covered auto stocks under the 2008 recession scenario, which is now our base case,” Mr. Barry wrote in a note. “But timing of entry is the critical question and we think it is too early to begin building positions in the auto names.”

Consensus estimates for auto stocks are still too high and have to come down, which will have a negative impact on sentiment, Mr. Barry says. Decade-low auto sales numbers and other negative economic data over the next few months is also likely to put pressure on shares of auto companies, he argues.

In the past three recessions, auto stocks generally followed the path of auto sales, Goldman data shows. In the 1980-81 and 1990 recessions, auto stocks bottomed out about three months before the annual sales rate started to recover. In the 2001 recession, both recovered at the same time, partly because of General Motors Corp.’s (GM) fast and aggressive “Keep America Rolling” sales promotion.