This is Morgan Stanley’s top pick in autos, and it’s not Tesla
MarketWatch
Sep 11, 2017
By Claudia Assis
Tire maker Goodyear is about to enjoy a ‘long-term boom’
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A 119-year-old company that sells a mundane product, and whose stock is falling, has emerged as Morgan Stanley’s top pick in autos and shared mobility.
The analysts, known for being bullish on Tesla Inc. (TSLA) and forecasting a future of driverless cars and electric vehicles, have zeroed in on Goodyear Tire & Rubber Co. (GT)
Investors should look at the ongoing downdraft for Goodyear stock as a buying opportunity, one that would pay off in years to come as the company could enjoy a “long-term boom,” they said.
“We take advantage of weakness in the shares and increase conviction in the Goodyear story. Well-positioned for a long term boom in miles traveled, the story sets up very well through year-end and into early 2018,” they said in a note Monday.
Goodyear shares are among the cheapest in the S&P 500 index (SPX) but the stock’s underperformance is mostly due to company-specific and execution factors that the analysts don’t expect to repeat in the next two years.
Goodyear in July reported second-quarter results broadly in line with expectations, but it slashed its outlook for the year, sending the stock to a post-results tumble.
The Morgan Stanley analysts upgraded Goodyear’s stock to their equivalent of buy in June.
Goodyear is “relatively less exposed” to the light-vehicle credit cycle, used-car prices, and the decline of internal combustion engines, the three key factors that drive Morgan Stanley’s cautious view on many shares in autos, the analysts said.
Moreover, Morgan Stanley forecasts that vehicle miles traveled will double to 20 trillion miles by 2030, and triple to 30 trillion miles by 2040, and even allowing for a potential commodification of tire demand, “we believe strong growth in replacement demand can create a favorable supply/demand balance in the years to come,” the analysts said.
Longer term, Goodyear could even transition to a mobility services company.
“Although the company has not publicly commented on this, we see scope to gradually exit/outsource its manufacturing operations, to focus on higher value added areas of fleet service and distribution, where we see a longer term competitive moat, with potentially significant financial and strategic value,” they said.
The Morgan Stanley analysts have Adient PLC (ADNT) and Fiat Chrysler Automobiles NV (FCAU) as their No. 2 and No. 3 pick in U.S. autos and shared mobility. General Motors Co (GM) and Tesla Inc. are a distant No. 8 and No. 11, with Tesla rated the equivalent of hold. Ford Motor Co. (F) is third to last on Morgan Stanley’s list, rated the equivalent of sell.
Shares of Goodyear have underperformed the broader market, up 2% so far this year to the S&P’s 11% gain. The shares have lost more than 11% in the past three months, versus a gain of 2.3% for the S&P, and are down nearly 60% from their 1998 high of $75.75. The stock was the fifth best performer in the S&P on Monday.
