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Automotive Sector: Morgan Stanley Optimistic Outlook on General Motors and Ford

Morgan Stanley Optimistic

As the auto industry stands at a pivotal crossroads, Morgan Stanley (NYSE: MS) Adam Jonas has spotlighted 2024 as a crucial year that could define the long-term relevance of the U.S. auto industry. This analysis delves into Jonas’s insights, focusing on General Motors (NYSE: GM) and Ford (NYSE: F), and explores the intricate dynamics shaping the future of these automotive giants.

Morgan Stanley Outlook on GM and Ford

Jonas predicts 2024 as a make-or-break year for the U.S. auto industry. His outlook is underpinned by an ‘overweight’ rating on both GM and Ford, suggesting potential growth despite recent market underperformance.

R&D Expenditure vs. Market Cap

A striking point raised by Jonas is the disproportionate R&D and capex spending by GM and Ford compared to their market cap. While the average S&P 500 company spends its market cap in capex and R&D over 50 years, GM and Ford do so in just 1.9 and 2.6 years, respectively. Jonas argues that this rate of expenditure is unsustainable.

The Tug-of-War in Auto Manufacturing

A key factor in the automotive sector’s future is the ongoing tug-of-war between electric vehicles (EVs) and internal combustion engines (ICEs). Interestingly, the rise in EV adoption is paradoxically bolstering the ICE market, as it leads to reduced gasoline demand and lower prices, making ICE vehicles more cost-effective.

Addressing Labor Costs

GM and Ford have reported substantial profits, but there’s a looming concern about how escalating labor costs might impact these margins. Price adjustments in auto sales might be a simple solution, but the real test lies in the execution of such strategies.

Balancing Capex and Shareholder Value

Jonas points out that while both companies are eager to invest in EVs, they are also mindful of returning capital to shareholders. GM, for example, has increased its R&D spend by 50% since pre-pandemic times, focusing on EV build-out while simultaneously buying back shares.

The Shift in EV Capex Strategies

Recent trends indicate a slowdown in EV capex buildout, responding to accumulating EV inventories and fluctuating demand. This strategic adjustment aligns with Jonas’s advocacy for a more measured approach in R&D spending.

Market Capitalization and R&D Investment

An interesting perspective arises when considering R&D as a percentage of market cap. The current low market cap of these companies, a decision of the market, shouldn’t necessarily dictate the R&D strategy, which is a management prerogative.

The Path Forward for GM and Ford

The upcoming GM analyst day could serve as a potential catalyst, offering insights into the impact of labor strikes and future guidance. Analysts are cautiously waiting for management’s guidance before adjusting their forecasts.

Long-term Value vs. Short-term Fluctuations

Despite the stocks’ lackluster performance, a long-term investment perspective may still see value in these companies. The focus is on their earning potential relative to their share price.

Facing Economic Uncertainties

The historical trend shows that American automakers often emerge weaker post-recession. However, GM’s current financial strength, with significant net cash and robust free cash flow, may buffer future recessions. Yet, in the event of an economic downturn, the financial health of these companies is expected to decline.

Watching for Leadership Insights

An upcoming interview with GM’s CEO Mary Barra could provide more clarity on the company’s direction and strategies in navigating these challenges.

As 2024 approaches, GM and Ford find themselves at a critical juncture. Balancing R&D investments with market cap realities, navigating the EV and ICE markets, and preparing for potential economic downturns are key challenges. Investors and industry watchers alike are keenly observing these developments, as the decisions made today will significantly impact the future trajectory of the U.S. auto industry.


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