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3 car companies facing challenges: The transition to EVs is slowing and investors should be cautious

DK
Do Kwik
· · 3 min read

The U.S. automotive industry is undergoing major changes, primarily due to the transition to electric vehicles (EVs). Although sales of traditional gasoline-powered vehicles remain solid, the growth in EV sales is not progressing as fast as originally expected.

Morgan Stanley analyst Adam Jonas responded to this development by warning of a difficult future for automakers. He recently downgraded Rivian Automotive $RIVN, Ford Motor Company $F and General Motors $GM. Here are the main reasons for his decision and its potential impact on investors.

The View from the Heights

Jonas not only downgraded these specific automakers, but he also changed his view of the entire U.S. auto industry. He has moved it to "mediocre" from its former "attractive" status, suggesting that he now sees little room for stock value growth in the sector. He points to rising dealer inventories in the U.S., which typically pushes down new car prices. While this may seem like bad news for manufacturers like Ford and GM, it may in turn contribute to greater vehicle availability. The cost of a typical car payment has risen by around 40% from pre-pandemic levels, and lower prices could boost demand.

Jonas also points to problems in the Chinese market, where growth is slowing and excess production capacity is complicating matters. China reached a historic milestone in July when more than half of passenger cars sold were electric, while U.S. automakers there are losing ground.

The view of others

But some analysts remain optimistic. Bank of America analyst John Murphy, for example, believes a potential drop in interest rates could boost new car sales. In his September report, he said lower rates could boost demand, fueled by unmet demand and new mass-market models.

Impact on specific car companies

It should be pointed out that some of this pessimism is already reflected in the current stock prices of Ford and GM, whose price-to-earnings (P/E) ratios are below 10 and 5, respectively. Jonas downgraded General Motors from a "hold" to a "sell" rating and lowered his price target to $42. Similarly, he downgraded Rivian and Ford from "buy" to "hold" and adjusted their target prices.

What does this mean for investors?

While Jonas' concerns are valid, it's likely that some of these negative factors are already priced into the stock. The transition to electric vehicles will be long and fraught with financial losses, but may prove profitable in the long run. In the short term, however, investors must expect a tumultuous period, and therefore Jonas' assessment that the automotive sector is no longer 'attractive' but rather 'mediocre' seems justified.

Disclaimer: You will find a lot of inspiration on Bulios, but stock selection and portfolio construction is up to you, so always do a thorough analysis of your own.

Source: Yahoo, The MotleyFool.

Stocks mentioned

GM

GM

F

F

RI

RIVN

A community member's personal view, not investment advice. Community Guidelines

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