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Morgan Stanley’s Adam Jonas just made Ford his top pick in the auto sector.”Ford is a levered play on US housing recovery and European restructuring with almost no earnings exposure to China,” he wrote in a note to clients. “Underpinning it all is a radically improved product offering produced on common global architectures that hangs with the industry’s very best.”
Jonas has a $17 price target on the stock, which closed at $10.10 on Tuesday.
The U.S. auto sector has plenty of bullish tailwinds.
Among other things, the existing car fleet is old. From his note:
Now one of the existential pillars of the rather fashionable pent-up-demand argument is that cars are just plain old! We’ve all seen the statistics. The average light vehicle on the road is approximately 11 years old. But just think about what 11 years means for a moment. We know how many miles are driven on US roads each year and we know the total car population for each year. The average car on the road has up to 140k miles on the odometer.
And the old car thesis is not just about mileage. Jonas continues:
Fact is, the US light vehicle fleet is not just old – it’s unreliable, way out of warranty, has 2 air bags (or if it has 4, maybe 2 of them actually work). iPod connectivity? Negative. And just imagine the fuel economy. The average car on the road is a model year ’01 which, at the time, claimed a fuel economy of 22mpg – when the testing procedure was a real stitch-up. A gallon of gasoline in the US in December 2001 cost $1.19. Cheaper than a bottle of mineral water? Cars were tested on beautiful California mornings with the AC off and the tires perfectly inflated. Real-world fuel economy was closer to 18mpg brand now. Add 130k or 140k miles to the clock and we’re lucky to get 15 or 16mpg. The US car parc is not just old… it’s obsolete.
Indeed, September was a huge month for U.S. auto sales, with 14.87 million units sold at an annualized rate. This pent-up demand thesis may be being fulfilled.
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