Why Credit Suisse Now Likes GM Handily Over Ford

Over the past five years, there have been many auto sector sell-offs, mostly driven by risk-off environments unrelated to autos, and analysts have said that buying the dip has been a relatively straightforward call. However, this time Credit Suisse believes it feels different, as the brokerage firm believes that auto volumes have reached a peak in the United States, which could mean either deterioration in pricing/margin or in volume.

Many investors agree and see only two scenarios. The first is having volumes remain with significant deterioration in pricing/margins for original equipment manufacturers (OEM) and suppliers (with an eventual cyclical decline). Second, there could be an outright decline in the near term. Either way, it’s seen as a poor time to own auto stocks.

So Credit Suisse issued calls on a few auto companies: Ford Motor Co. (NYSE: F), General Motors Co. (NYSE: GM) and Delphi Automotive PLC (NYSE: DLPH).

Credit Suisse detailed in its report:

Since late third quarter, we’ve seen slight but noticeable deterioration in SAAR quality (slower ATP growth, higher incentives, rising inventories, slightly worse credit quality) that points to peaking volumes. It’s been primarily on the car side, but that can’t be discounted, given the difficulty of meaningfully adjusting near-term production mix. And catalysts in the near-term are likely to be negative, as the industry grapples with this shoulder phase: 1) Car Pricing will get worse to clear inventories; 2) Negative news flow around production cuts is likely; 3) Production cuts will drive negative est revisions (we believe 3rd-party est’s of 3%-4% NA production growth in ’16 are too high); 4) Could begin to see mgmt teams selling personal shares or slowing down buyback pgm’s.

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Ford was downgraded to an Underperform rating with a $13 price target and earnings per share estimates of $1.92 and $1.85 in 2016 and 2017, respectively. However Credit Suisse continues to favor GM to Ford on the relative trade, primarily due to continued self-help costs savings, a favorable product cycle in 2016 and 2017, very favorable inventory position in the United States, and a potential trough earnings scenario that should be less severe versus Ford. Delphi is the top supplier pick.

Shares of Ford traded down nearly 4% to $11.94 on Wednesday, with a consensus analyst price target of $15.82 and a 52-week trading range of $10.44 to $16.74.

GM shares were down 3.5% at $28.35, with a consensus price target of $38.63 and a 52-week range of $24.62 to $38.99.

Shares of Delphi were last seen down 2.6% at $62.72, within a 52-week range of $55.59 to $90.57. The consensus analyst target is $89.88.