Trading the sector; reiterate CL-Buy on FCA and Continental
* FCA and Conti CL-Buys
Reflecting our structural views, our top picks going into 2016 are FCA (CL-Buy) and Continental (CL-Buy). We see FCA as best placed to benefit from industry consolidation, and we see Conti as a key beneficiary of auto megatrends, with global exposure to powertrain, emission, safety, infotainment and connectivity trends.
* Premium for suppliers’ returns justified
We believe the market questions the sustainability of OEM returns, discounting regulatory, China, and business model risks. For the suppliers, in contrast, we see the market ascribing a premium as warranted and sustainable in an industrials space where growth is scarce.
* Need for scale can force consolidation
In an investment-hungry sector already struggling to earn its cost of capital, we see an industrial logic to consolidation; we believe it is a process waiting to be set in motion.
* Upgrade Hella to Buy, reinstate GKN at Buy
We upgrade Hella to Buy on strong organic growth (albeit amid a pause in margin expansion) and reinstate our rating on GKN at Buy on valuation combined with a resumption of growth in 2016E. We introduce 2020E estimates across our coverage.