Carmakers and auto parts suppliers traded weaker on Thursday after Morgan Stanley warned of an "unprecedented buyer’s strike," and lowered its U.S. auto sales forecast by millions of units for each year though 2020.
The U.S. auto industry seems to have hit a point of diminishing returns, Morgan Stanley’s auto analyst Adam Jonas writes in a note to clients, and the tactics required to attract new customers are now putting even more pressure on the used-car market that is already suffering from a steep erosion in values. Jonas now expects the 2017 U.S. annualized automotive sales rate, adjusted for seasonal trends, to reach 17.3 million, down from a prior expectation of 18.3 million, as last week’s May sales results were insufficient to support the prior estimates.
Morgan Stanley’s call comes at a time when the U.S. automakers are grappling with challenges on several fronts. While the prices of used vehicles are falling steadily, inventories are rising and carmakers are dialing up the discounts to attract more buyers, which can erode their margins. On the other hand, the advent of self-driving technology, electric cars and the rise of shared transportation is creating pressure on the traditional auto industry model. Sales in March, April and May have fallen below the annual pace of 17 million, prompting several industry analysts to lower their estimates for the year, especially as outlook for the second-half also seems murky.
Jonas’s estimate cuts for the years 2018 to 2020 are more substantial, indicative of a broader slump. Morgan Stanley now expects 2018 sales of 16.4 million units, compared to 18.9 million previously, with the rate slowing to 15 million in 2019 and 2020, reflecting the possibility of further decline in used-car prices due to technological obsolescence. To maintain that lower level of sales, government support for new car purchases would be needed, Jonas says.
Price targets were lowered for 15 companies in the industry, including by more than 10 percent for Adient Plc., Ford Motor Co., Group 1 Automotive Inc. and Lear Corp. Earnings estimates for 2018 and 2019 were also cut across the sector, prompting an early selloff in the shares of most auto names on Thursday. The Russell 300 Auto Parts Index was down 1.7 percent as of 10:34 a.m. in New York and the S&P Supercomposite Automotive Retail Index fell 1.4 percent.
Not everyone, however, is climbing on the bandwagon of bad days ahead for automakers. Baird Equity Research analyst David Leiker wrote in a note dated June 7 that "sentiment is too negative" and that there was a "lack of evidence to support a cyclical decline in demand."
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