Credit Suisse Warns Of 'Pockets Of Concern' In Auto Market

• Shares of AutoNation, Inc. (NYSE: AN), Ford Motor Company (NYSE: F) and General Motors Company (NYSE: GM) are all down more than 10 percent in January 2016.
• Credit Suisse’ Dan Galves maintained a Neutral rating for Ford and an Outperform rating for on General Motors, with price targets of $38 and $15, respectively.
• Dealer concerns are likely to continue to expert pressure on automobile stocks in the near-term, Galves stated.

Analyst Dan Galves mentioned that the recent pullback in automobile shares was triggered by comments by AutoNation and Asbury Automotive that weak 4Q margins had resulted from the industry moving to an OEM Push environment, as against compared to the Consumer Pull of the previous several years.

“After discussions with these dealers and other industry contacts, we believe the situation is more nuanced than broad-based and does not signal an impending downtick in demand (vs 17.4MM in 2015) nor a significant weakening of price,” Galves wrote.

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The two dealers have significant exposure to premium luxury brands, the demand for which weakened in 4Q. “AutoNation's new vehicle unit sales are 19% premium luxury brands (vs 9% for the industry as a whole). AutoNation / Asbury derive 31% / 39% of new vehicle revenue from these brands,” the analyst added.

He mentioned that while inventory in the automobile industry as a whole was in good shape, there are some pockets of concern. While Sedan are over-stocked, Truck/SUV inventories are well below normal.

“Pricing remains in check, with Incentive as % of ATP at 10.4% in 4Q15…up 60bp's YOY but down slightly from Q3 (incentives normally rise sequentially),” the Credit Suisse report noted.

“We are not bullish on SAAR growth (our company estimates are based on 17.4MM / 17.0MM in 2016 / 2017 vs 17.4MM in 2015). But we also see low risk for a more significant decline, given strong job growth and low fuel prices, two key historical drivers of auto volumes,” Galves stated.

The analyst expects weak car pricing to be offset by the pricing in the strong truck/SUV segment, as was the case in 2015. Auto stocks could remain under pressure in the near-term, “particularly with dealers likely to reiterate concerns on earnings calls later this month.”