Auto dealer stocks fall on Wall Street after bearish Morgan Stanley report

Stock prices for public dealership groups took a hit Wednesday after Morgan Stanley equity analyst Adam Jonas released a research note expressing caution.

In his report, Jonas downgraded Penske Automotive Group Inc. and Sonic Automotive Inc. "as a reflection of secular industry headwinds despite peak earnings."

On Wednesday, share prices fell by 10.4 percent for Penske, 8.6 percent for Sonic, 11.5 percent for Group 1 Automotive Inc., 9.7 percent for AutoNation Inc., 9 percent for Lithia Motors Inc. and 8.5 percent for Asbury Automotive Group Inc., according to MarketWatch. Share prices for those companies improved slightly on Thursday.

Jonas expressed concerns about the pressure franchised dealerships face as Tesla Inc. and other electric vehicle makers expand and likely increase the volume of direct-to-consumer vehicle sales. EV startup Rivian also is planning direct sales, and Vietnamese startup VinFast recently said it plans 60 direct-to-consumer EV dealerships in California.

The Morgan Stanley report positioned the inability of legacy automakers to control the consumer experience in a direct-sales model as one of the biggest threats facing automakers — "even bigger than the threat of electrification itself."

He acknowledged that it's a "highly complex issue" involving regulatory, legal and even social factors that could take years to play out.

Meanwhile, in a note issued Thursday by Truist Securities, analyst Stephanie Moore countered some of the points in the Morgan Stanley report and said Wednesday's roughly 10 percent price drop for the public dealership groups represents a buying opportunity. Moore wrote that the threat of the direct-to-consumer model and EVs as outlined in the competitor's note "is overblown with limited downside risk to earnings, in our view."

Moore's report reasoned that the direct-to-consumer model is not new, noting that Tesla has operated such a setup since its inception and that nothing much has changed in the last few days to fundamentally change how EVs and direct-to-consumer models fit into the auto ecosystem.

EVs do not have to be sold in a direct-to-consumer model, Moore wrote, and traditional automakers by and large are relying on dealers to sell their own electric offerings. She also noted that EVs will also require education for buyers as well as parts and service provided by dealers.