In contrast to Standard & Poor’s gloomy outlook for US suppliers, the laggard auto industry got a boost Thursday after a Lehman Brothers analyst upgraded the sector, including General Motors and a host of the auto maker’s suppliers, the Associated Press (AP) reported.
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In research note, analyst Darren Kimball reportedly raised the sector’s rating to “Neutral” from “Negative,” saying that General Motors’ sales pace has not slowed materially and industry sales could beat June levels – in a separate report, the analyst upgraded GM to “Equal Weight” from “Underweight.”
AP noted that GM shares moved $US1.13 higher, or 3.1%, to close Thursday at $37 on the New York Stock Exchange and was the biggest percentage gainer on the day in the Dow Jones industrial average of 30 major stocks.
Visteon led the pack of industry suppliers trading higher on the New York Stock Exchange – its shares jumped 86 cents, or 11.5%, to close at $8.33, Delphi shares gained 12 cents, or 2.3%, to $5.20, and Johnson Controls rose 1 cent to $58.78, the report added.
Although production at the Big Three auto makers – GM, Ford and DaimlerChrysler – has declined an average of 5% per year for the past three years, Kimball reportedly said, the industry may be poised for a modest turnaround.
“We now think production could be flat next year,” he said, according to the Associated Press. “And based on the information we have about July sales, we have to suggest that things could even be a little bit better.”
The Dow Jones US Automobiles and Parts index rose $2.50, or 1%, to close at $250.13. AP noted that the index has declined about 18% since the start of the year.
The sector’s depressed stock charts, and billionaire investor Kirk Kerkorian’s interest in GM, have value investors giving the sector a second glance, Kimball told AP, and any restructuring announcement would be more good news – but he stopped short of being bullish.
“At the end of the day,” he told AP, “a GM restructuring is at odds with value creation for suppliers. Plus, only GM has a diversified finance sub and Kerkorian as a major investor.”
The analyst said margins and returns are expected to improve next year from record lows this year on the supply side, but “suppliers with US cost structures, forced to sell at or near landed-China prices, will likely continue to see pressure on profitability”.
AP said the analyst upgraded Visteon to “Overweight” from “Underweight” and raised its price target and also raised price targets on TRW Automotive Holdings and BorgWarner, and maintained an “Overweight” rating on both.
