Morgan Stanley fired off some ratings actions on auto supplier stocks after taking a deep dive into the sector.
Analyst Adam Jonas and team upgraded American Axle & Manufacturing Holdings (AXL +5.9%) straight to an Overweight rating from Underweight, while they lowered Lear Corporation (LEA -6.5%) to Equal-weight from Overweight.
Morgan Stanley on AXL: "While we are still bullish on long term EV adoption, we believe the pace of adoption for AXL’s key OEM customers may be materially slower than the market expects, driving an elongated ‘sun-setting’ of some highly profitable ICE businesses where the company can harvest the cash for shareholders. While AXL is allocating portions of its cash flow towards EV-oriented projects (i.e. E-Axles), we believe the majority of the cash will likely be used to de-lever the balance sheet, driving potentially substantial upside in shares>"
Morgan Stanley on LEA: "While LEA has a strong Seating business which is powertrain agnostic, our prior OW rating was premised around the E-Systems business accelerating growth, specifically within BEVs, while producing a healthy margin. Our revised estimates de-risk growth in both Seating and E-Systems, though our seating margin remains largely unchanged through the rest of the decade, while our E-Systems margin is reduced 50bps by 2030. Additionally, at just ~10% upside to our PT."
Read about last week's rally in auto supplier stocks.