Report Card: David Bradley

David Bradley J.P. Morgan Chase
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3rd Place Automobiles

Bio

M.B.A., The Wharton School. Bradley has been an auto and auto-parts analyst for 15 years. He initially worked on J.P. Morgan's auto industry financial advisory in 1986 and then moved to the firm's equity research department in 1993.

Industry Outlook and Style

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For the beleaguered auto industry, J.P. Morgan Chase's Bradley says, "My outlook isn't very good." As the economy cooled in the back half of 2000, cyclical stocks like autos typically saw slowing sales and falling earnings. On average, fourth-quarter earnings were down 50% year over year and consensus estimates for 2001 have been revised downward by the same margin, the analyst says. The auto industry has high operating leverage, so a small decline in volume can have a major negative impact on earnings, the analyst explains. He adds, "The only question now is how much of a drop and for how long."

Stocks in the sector rallied after the January Fed rate cuts, but the analyst says that rate cuts "won't translate into higher auto sales for at least a year." Feeling it's early yet, he'd prefer to wait until near the end of the year before investing in the sector. The analyst concedes, however, that he was surprised by the strong car sales in January and February, which followed weak car sales from October to December of last year. This may signal that the economic downturn isn't as bad as many feared. Still, he cautions that the Big Three are rapidly losing market share to carmakers from Europe, Japan and South Korea.

Bradley turned bearish on the group in May of 2000. At that point, the analyst downgraded half the stocks in his universe; by September he had downgraded the other half. The one automaker he maintains a long-term buy rating on is Ford(F Quote), which he calls "a quality name to own in an uncertain economic environment." But with the stock trading near his price target of $30, Bradley says it's not a "table pounder."

He also notes that he has been warming up to DaimlerChrysler(DCX Quote) in recent weeks as the "highflier has gone from $37 to $50."

The J.P. Morgan Chase analyst says he prefers the auto-parts segment over auto manufacturers, in part, because auto-parts tends to have a diversified business mix. The only company on which Bradley has kept a buy rating is Johnson Controls(JCI Quote), which, he notes, has done very well in recent months. An auto-parts company focusing on interior products for the car, the firm is expanding into the electronics arena, with rear seat video entertainment systems. In addition, they have a diversified portfolio outside of automotive; their primary nonautomotive product is building controls for heating and air-conditioning systems.

Bradley also likes TRW(TRW Quote) long term, praising its development of high-power chips that will have broad applications in the telecom arena. Yet in the near to medium term, he admits, "I'm not very optimistic about their automotive prospects." (J.P. Morgan Chase has had investment banking relationships with all four companies recommended in this story.)

Stock Pick

Favorite stock for next 12 months: Johnson Controls
Comment:
"I think a key metric that investors pay more and more attention to in this day and age is return on capital, and it's got the highest return on capital of any auto-parts company. We're predicting this year around a 24% ROIC (return on invested capital). That ROIC has been rising every year for the last several. The company's had a higher top-line growth than just about anyone in the sector, running close to 20%, and that's probably going to slow to about 10%, maybe even less because of economic conditions. But it's got a very good, impressive track record of better-than-peer-group top-line growth. It's a defensive stock, and it's got lower operating and financial leverage than its peer group. And the top-line growth is the byproduct of a great track record in product innovation."


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Which stock do you like best? Girsky and Lapidus: Lear Corp. Bradley: Johnson Controls