After a double-downgrade from Wells Fargo that warned of persistent price increases and adverse regulatory requirements, shares of both automakers eroded by more than 3% in Thursday’s trading. The declines added to over 40% drops from the start of 2022 for each of the Michigan-based auto manufacturers.
However, Morgan Stanley analyst Adam Jonas advised the risk/reward dynamic has finally reached a balance in a note to clients on Friday.
In laying out the potentially disparate outcomes he projected separate scenarios in which each stock could either accelerate or decelerate from its current rut.
On the positive end, Jonas noted that both companies have been able to pass on much of their cost increases to consumers and pent-up demand remains strong as “dealers report strong conversion rate from show-room traffic.” Meanwhile, more negatively, he surmised supply chain shortages could continue to eat into margins, energy price shocks could hurt demand, and falling used car prices could pressure each company’s captive finance operations. All of this adds to the Federal Reserve overhang on the auto industry.
“Historically, monetary tightening has the biggest effect on durable goods purchases, and to a large extent, that’s cars,” Jonas wrote. “Academic literature points to the effect on durable goods to be around 5 times as large as on other consumption expenditure.”
He concluded that the balance of factors leaves the stocks in “limbo” at present. However, that perspective also prompted Jonas to upgrade shares of Ford (F) from “Underweight” to “Equal-weight” after its recent selloff. He now maintains bear and bull cases for the stock, with price targets of $5 and $25 respectively. His base case target remains at $13, essentially in line with Friday's implied open.
While General Motors (GM) rating was stable at a “Hold” equivalent, Jonas reeled in his price target from $50 to $44.
Despite the tepid review, shares of both automakers rose sharply in pre-market trading on Friday, building back from bearish action to start the month of May.
Read more on Wells Fargo’s more pessimistic forecasts for each stock.