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HomeMarketA Tesla Bull Still Likes Internal Combustion Engine and Hybrid Car Technology

A Tesla Bull Still Likes Internal Combustion Engine and Hybrid Car Technology

Morgan Stanley analyst Adam Jonas see hybrid calls sticking around for longer than most people expect.

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Toru Hanai/Bloomberg

Internal combustion engine technology and hybrid cars will be around for longer. That’s the view of a notable
Tesla
bull and its driving him to see new opportunity, and risk, for a couple of car stocks.

Monday,
Morgan Stanley
analyst Adam Jonas upgraded shares of auto parts maker
BorgWarner
(ticker: BWA) to Hold from Sell. His price target went to $45 from $35.

It’s only a Hold rating, but it’s still noteworthy. One reason that Jonas has been bearish on Borg stock is it makes a lot of parts for traditional internal combustion engines and transmissions. That business is at risk as more electric vehicles are sold around the world. (Borg sells products used in EVs as well.)

Jonas sees a “longer” tail for internal combustion engine business and believes investors will pay a higher multiple for Borg stock once investors realize that business will be around longer than they might fear.

BorgWarner stock trades for less than 9 times estimated 2023 earnings. The
S&P 500
trades for roughly 17 times earnings. Car companies don’t trade at big valuation multiples.
General Motors
(GM) stock trades for less than 7 times estimated 2023 earnings.

Investors believe the long-term growth rate is lower for the traditional car industry compared with the overall economy. There is also the global transition to EVs to consider.

Along with the Borg upgrade, Jonas also downgraded
Aptiv
(APTV) to Hold from Buy. His price target falls to $105 from $120. The reason for the
Aptiv
downgrade is the same as the Borg upgrade: A potentially slower pace of EV adoption.

Aptiv
trades for about 21 times earnings because it sells relatively more parts that go into EVs as well as advanced driver assistance systems.

The call for slower than expected EV adoption is a little surprising. Jonas is a
Tesla
(TSLA) bull, rating share Buy. His price target is $330 a share, up about 80% from recent levels. What’s more, he calls shares of EV battery startup
Freyr Battery
(FREY) a top pick.

The pace of EV sales supports that bullish view. EV penetration has roughly doubled in the U.S. so far in 2022, compared with 2021, but overall EV penetration of new car sales is still about 5% to 6%. In China penetration of plug in hybrid and battery electric cars has exceeded 30% of new car sales in recent months.

There are still more gains to be had for EV technology.
Ford Motor
(F) and GM hope to be selling about 1 million EVs in North America annually by mid-decade. And Jefferies analyst Johnson Wan sees EV penetration of new car sales in China hitting 39% in 2023.

Still, there is a price for everything which means an opportunity in shares of traditional parts provider Borg, according to Jonas.

With the Aptiv cut, about 74% of analysts covering Aptiv stock still rate shares Buy, according to FactSet. The average Buy-rating ratio for stocks in the S&P 500 is about 58%.

The Borg upgrade to Hold doesn’t change the average Buy-rating ratio for Borg stock. About 53% of analysts covering BorgWarner stock rate shares Buy.

Along with Morgan Stanley’s ratings changes. Citi analyst Itay Michaeli, over the weekend, downgraded parts producer
Magna International
(MGA) to Hold from Buy. His price target is unchanged at $62 a share.

Michaeli notes that parts shortages that have constrained global auto production will still be with the industry–and investors–headed into 2023. That’s another thing for investors to consider, along with the bigger theme of EV adoption.

With the cut about 68% of analysts covering Magna stock still rate shares Buy. Magna stock trades for about 10 times estimated 2023 earnings.

Magna stock is down about 0.3% in premarket trading Monday. Aptiv shares are off about 2%. Borg stock is getting a bounce, up about 2.8%. S&P 500 and
Dow Jones Industrial Average
futures are off about 0.7% and 0.6%, respectively.

Write to Al Root at allen.root@dowjones.com

Credit: marketwatch.com

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