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I-Graders Debate Timing Of Auto Sector Downshift

20 Apr 2002

Analysts and investors are divided as to whether there is still value in the auto sector. With rate hikes coming and varying credit problems at each of the big three, some analysts question the wisdom of being overweight the sector. "It is historically a good move once the Fed actually begins raising rates," says Vince Boberski, corporate bond strategist at RBC Dain Rauscher. That said, he believes it is still too early. He says bonds of Ford Motor Co., look like a good long-term value versus those of General Motors and Daimler-Chrysler, but that GM is the best short-term buy from a fundamental standpoint because of equity momentum, earnings and product lineup.

Last Wednesday, the Ford 7.25% notes of '11 (A3/BBB+) were quoted at 224 basis points over Treasuries. The GM 7% notes of '12 were 178 over the curve and the Daimler Chrysler N.A. 7.3% notes of '12 (A3/BBB+) a dime tighter at a 168 bid.

Margo Cook, head of fixed-income at BNY Asset Management, also believes spreads are still too wide in the sector to begin selling. Cook sees particular value in Ford bonds, but says she will not add because BNY already has a significant investment in the name.

But Carol Levenson, analyst at independent research provider GimmeCredit, does not see much upside in any of the auto credits at this point, and has been urging investors to lighten up on the sector for some time. She believes the market has priced in a perfect outcome for GM with its proposed sale of Hughes Electronics Corp. to Echostar Communications, but cautions, "Hughes is not a slam dunk, and if it doesn't happen and no cash comes in, the pension fund needs feeding."

20 Apr 2002