Morgan Stanley downgrades GM after nailing a 50% gain in the stock

Morgan Stanley auto analyst Adam Jonas is known for his out-of-the-box thinking on Tesla, but he’s pretty good at analyzing the traditional automakers too.

Jonas downgraded GM shares Wednesday to equal weight from overweight after nailing a breakout in the 109-year-old company.

“Our OW [overweight] thesis that GM could change the narrative and drive share price higher has played out, leading us to move to the sidelines,” the analyst said in the note. “Our downgrade is an expression of our view that the stock may have run too far too fast.”

Jonas upgraded GMin September 2016
and the shares are up 53 percent since that call, more than double the return in the overall market. He got even more bullish about GM
in June before the stock really took off, giving a “sum-of-the-parts” analysis that showed the shares were worth a lot more when valuing its many units separately.

GM vs S&P 500 since September 2016

Source: FactSet

GM reported better-than-expected sales on Tuesday, justifying the recent run.

Jonas believes GM may take further steps to unlock the value of its parts after recently selling its Opel/Vauxhall European unit.

“We believe GM’s shareholder structure (i.e. lack of a government, family or strategic blocking minority) is unique among the global auto industry and makes the topic of strategic alternatives a potentially more relevant consideration for management and the Board,” he wrote Wednesday.

But those strategic changes are likely now priced into the surging stock, according to Jonas.

“The 35% run-up in GM’s share price in recent weeks has taken GM EV/EBITDA to 4.6x on our 2018 forecasts. By comparison, Ford trades at 3.7x, FCA at 1.8x. In Europe, the German premium leaders such as BMW and Daimler trade at 2.3x and 3.7x EV/EBITDA, respectively,” states the note.

Jonas is also not very optimistic the auto sales cycle, which should weigh on the stocks. He believes U.S. sales peaked last year at nearly 18 million units and will fall to 15 million units by 2019.

His favorite stock in the auto space is now Goodyear, which he sees rallying 35 percent over the next 12 months.

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