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Auto Shares Rise on Upgrade

Early indications show sales remain relatively strong in the new year.

Shares of

General Motors

(GM) - Get Report

and

Ford

(F) - Get Report

were rising Monday after Morgan Stanley Dean Witter upgraded the stocks to outperform from neutral, citing aggressive cost-cutting programs and continued strength in auto demand.

Morgan Stanley also raised the auto sector to overweight from market perform. Share of General Motors were lately rising $1.12, to $49.60. Ford was up 30 cents, to $14.91.

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DaimlerChrysler

(DCX)

, which the firm left at neutral, was gaining $0.55 to $41.65.

The Big Three have been slowly losing market share to foreign competition in recent years, and have lately been engaged in a price war that cut deep into profit margins. Earlier this month, Ford said it would slash its worldwide workforce by 35,000 jobs, close five plants and downsize 11 others, and sell noncore assets for close to $1 billion. General Motors has also said it expects to cut costs significantly in 2002.

"There is no question that the competition is the toughest it has ever been," wrote Steve Girsky, "but the Big Three still own a majority of U.S. market share and have significant scale advantages. We believe that aggressive cost reduction, focus on core products/business, increasing capacity utilization and strategic asset sales may be just the right impetus to get things going."

Industry analysts feared that auto sales would drop off significantly after 0% financing incentives generated a car-buying frenzy in the final four months of last year. But sales have remained strong so far this month. Girsky expects January sales to total 16 million units in annualized terms, and said that bodes well for demand in the rest of 2002. Meanwhile, inventory levels are below average, which should allow for either production increases or firmer pricing in coming months, he wrote.

"While demand is likely to weaken from 2001 levels, we believe that the dip will not be as severe as first expected and the recovery will be relatively sharp." Girsky forecasts car sales of 15.2 million in annualized terms for the first quarter, 15.5 million in the second quarter, 16.2 million units in the third quarter and 16.5 million units in the fourth quarter.

The analyst called the two biggest automakers "cheap" and put a price target of between $67 and $80 on General Motors, a target $20 to $24 on Ford, and a target of $35 to $40 on DaimlerChrysler.