Moats, Motors, and Markets in 2020
Our analysts offer their annual global auto overview, forecast, and actionable ideas.
Because some of our most high-profile automotive names, such as General Motors (GM) and Ford (F), do not have an economic moat, investors may assume that the entire auto industry is low quality, but we disagree. Suppliers often have moats from several sources in our moat framework, particularly intangible assets and switching costs, based on factors such as the long-term relationships with automakers that lead to win rates of 90% or higher on a new generation of a vehicle that the supplier already services. Some automakers we cover, such as Ferrari (RACE)/(RACE), even earn a wide moat around the intangible asset of their brands’ pricing power.
That said, we have long argued that a no-moat company and a cheap stock are not mutually exclusive. We reiterate that view with no-moat GM, which is in the midst of a cost-saving plan that we think could increase its adjusted automotive free cash flow to the vicinity of $10 billion in some years after 2020, up from pre-UAW strike guidance for 2019 of $4.5 billion-$6.0 billion and $6.0 billion-$7.5 billion guided for 2020. For investors preferring a moat, BMW (BMW)/(BMWYY) and Adient (ADNT), as well as leading turbocharger maker BorgWarner (BWA), offer good value, in our opinion, all with narrow moat ratings. Adient is the leading seating supplier and is going through a major restructuring, so we think the stock is only for the most patient investors. Still, we think that the current valuation is nonsensical and that the stock is a tremendous bargain.
David Whiston does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.