J.P. Morgan Issues Mixed Report on Auto Sector

Analysts say a few stocks have potential for gains, despite expected weakness in second-quarter results.
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J.P. Morgan issued a mixed report on the auto and auto-parts sectors Tuesday, saying a few stocks have potential for gains, despite expected weakness in second-quarter results.

In the research memo, the team of analysts said the two sectors have suffered from weak demand in the U.S., forcing the Big Three automakers to slash production by 12% so far this year. This is expected to cause "significant declines in second-quarter earnings for most auto and auto-parts companies," the memo said. On average, the auto companies that J.P. Morgan covers are expected to report a 33% drop in profit, the note said.

But not all is lost. The analysts also predicted that investors will focus on expected strong sales figures from the companies instead of weak earnings. Their assumption is that total industry sales could hit an annualized rate of 17 million units in July, up from an average 16.2 million in the second quarter and 16 million in the first quarter.

Based on those figures, J.P. Morgan recommends adding exposure to auto companies, including names like


(GM) - Get Report



(GNTX) - Get Report


Borg Warner

(BWA) - Get Report


Johnson Controls

(JCI) - Get Report




(F) - Get Report

and auto-parts maker


(LEA) - Get Report

are expected to beat second-quarter estimates. Ford has consistently seen seasonal increases from the first to the second quarter, and the company's own estimates are considerably lower than the market's consensus. As for Lear, the company raised its earnings estimates in mid-July, and analysts followed its cue amid expectations that it will gain market share over competitors.

On the negative side, the report said


(GT) - Get Report

could disappoint investors in quarterly earnings amid weak demand for tires and high prices for raw materials. The company warned last week that it would miss second-quarter estimates.

Late Tuesday, GM was down 18 cents, or 0.5%, at $36.12; Ford was up 12 cents, or 1%, at $11.43; Lear was down 35 cents, or 0.7%, at $48.98; Gentex was up 13 cents, or 0.4%, at $32.75; Borg Warner was unchanged at $66.36; Johnson Controls was down 43 cents, or 0.5%, at $85.78; and Goodyear shares were down 3 cents, or 0.6%, at $5.27.

J.P. Morgan has an investment banking relationship with all of the companies mentioned above, except for Gentex.