Is this analyst right about these 3 auto stocks?

The US auto industry is in the early stages of a major transition to electric vehicles (EVs). On the one hand, sales of traditional gasoline-powered vehicles are doing well, and sales of SUVs and trucks are still bringing in plenty of profits. On the other hand, electric vehicle sales growth is not accelerating as quickly as anticipated, and losses are mounting. That’s part of the reason why Morgan Stanley analyst Adam Jonas believes things are about to get tougher for the auto industry, and specifically downgraded Rivian Automotive (RIVN 3.85%), Ford Motor Company (F 0.94%)and General Motors (GM 1.46%). Here’s why and if the downgrade is warranted.

View from above

Jonas went so far as to cut his view on the broader U.S. auto industry, moving his view from “attractive” to “in-line,” meaning the analyst doesn’t think investors should allocate too much much of their portfolio in auto stocks. Essentially, Jonas says he sees no upside in the industry right now.

One point Jonas points out is that US dealer inventories are rising, which has historically put pressure on new vehicle prices. While at first glance this sounds like bad news for automakers like Ford and GM, it might not be all that bad. Consider that vehicles aren’t all that affordable yet, with a standard car payment up about 40% from pre-pandemic levels. Some reduction in vehicle prices could actually improve vehicle demand.

Another thing Jonas points to is slowing growth in China, with too much manufacturing capacity. It’s true that American automakers have struggled to keep up with China’s rapid transition to electric vehicles. In July, electric vehicles in China accounted for more than 50% of new car sales for the first time. U.S. automakers’ sales in China have been declining for years and will never become the second pillar of profits, alongside North America, that management once envisioned.

It is worth noting that Bank of America analyst John Murphy is more optimistic because of possible help from a rate cut. “We expect lower rates to support new vehicle sales, which we are already constructive on due to pent-up demand and incremental mass market model launches,” the analyst wrote in a September report, according to him. Barrons.

Specific cars

It’s also worth noting that much of this pessimism is already priced into Ford and GM shares, with price-to-earnings (P/E) ratios of less than 10 and 5 times, respectively. Jonas downgraded General Motors from hold to sell and moved his price target to $42 from $47. Jonas downgraded both Rivian and Ford from buy to hold, with Ford’s price target moving from $16 to $12 and Rivian’s price target moving from $16 to $13. Overall, about 30% of analysts covering Ford have a buy rating, according to it FactSet. For GM, the buy rating is 55% and for Rivian it is 50%.

What does it all mean?

In general, investors should take these upgrades and downgrades with a grain of salt. While Jonas is right with his concerns, much of that sentiment seems to be already being priced into actions. But it is also true that the transition to electric vehicles will be a long one, with abundant losses in the short term. Ultimately, though, it’s easier to agree with Jonas’ assessment that the industry has moved from “attractive” to “in-line” because investors need to keep a long-term horizon for auto investing right now; the short-term transition to electric vehicles will simply be bumpy.