Auto sales have declined between 1 and 2 percent off 2016’s all-time highs and market experts expect no recovery.

Although still considering autos a “core” business line, Morgan Stanley is cautious on U.S. companies and discourages heavy exposure to both manufacturers and suppliers.

The Rating

Analyst Adam Jonas maintained Overweight ratings on Fiat Chrysler Automobiles NV (NYSE: FCAU) and Goodyear Tire & Rubber Co (NASDAQ: GT); Equal-weight ratings on General Motors Company (NYSE: GM) and Tesla Inc (NASDAQ: TSLA); and Underweight ratings on Ford Motor Company (NYSE: F), Hertz Global Holdings, Inc (NYSE: HTZ) and Avis Budget Group Inc. (NASDAQ: CAR).

The Thesis

“We expect 2018 to feature an unprecedented extension of auto credit as well as unprecedented levels of strategic activity,” Jonas said in a Tuesday note. “We anticipate returns to be highly idiosyncratic in 2018.” (See Jonas' track record here.)

Jonas gave six reasons for his take on the sector:

First, Jonas expects the financing and leasing momentum of 2017 to extend into 2018, buoying the industry to a 5-percent sales decline and, compounded with a potential increase in mix, supporting industry profitability.

Second, the accelerated evolution of vehicles places old and new models alike at risk of near-term devaluation and incentivizes consumers to lease rather than buy. The trend may stunt OEM sales and prompt a rise in product price.

Third, Jonas expects louder “noise” surrounding autonomous vehicles in 2018 as OEMs announce competitive strategies and update timelines.

Fourth, 2018 could see 2017’s theme of spinoffs, buyouts, initial public offerings and general restructurings “amplify materially” and shake up asset portfolios.

“We expect carve-outs to potentially have a bigger impact on stock prices than even the auto credit/cycle,” Jonas said.

Fifth, Jonas anticipates a successful Model 3 ramp inspiring material change in auto investor theses and forming a chasm in the electric vehicle field between Tesla and its competitors.

Sixth, the transition toward electric and autonomous systems is seen to incentivize OEMs to return to vertical integration models, which shifts outsourcing business from suppliers and puts those exposed to the old auto industry at risk of obviation.

Considering these factors, Jonas named Goodyear his top pick for its exposure to the “miles economy” and replacement demand. He’s “warming up” to Ford based on the potential for its strategy reveal, while he expects Tesla volatility based on destressing of its balance sheet.

Hertz and Avis are seen as having a 40- and 60-percent downside risk, respectively, amid rising competition from ride sharing services and vehicle cost inflation.

Price Action

At the time of publication, the auto-specific First Trust Exchange-Traded Fund II (NASDAQ: CARZ) was trading at $42.15.

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