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On Tuesday, JPMorgan issued a downgrade for Subaru (OTC:FUJHY) Corp. (7270:JP) (OTC: FUJHY) stock, adjusting its rating from Neutral to Underweight. The firm also revised its price target for the automaker, setting it at JPY2,500.00, a decrease from the previous target of JPY2,700.00. This change comes amid concerns about the company’s profitability in the near future. According to InvestingPro data, Subaru currently maintains a "GREAT" financial health score, with strong fundamentals including a low P/E ratio of 5.08 and a healthy current ratio of 2.63.
The downgrade was prompted by several factors that are expected to negatively impact Subaru’s financial performance. Analysts at JPMorgan anticipate a significant drop in profits starting from FY2025 due to a combination of challenges. Among these is a projected six-month halt in production at Subaru’s Yajima Plant, which is anticipated to disrupt manufacturing operations. Despite these concerns, InvestingPro analysis suggests the stock may be undervalued at current levels, with multiple ProTips highlighting strong cash flows and consistent dividend payments spanning 30 years.
Additionally, the introduction of hybrid electric vehicles (HEVs) using Toyota (NYSE:TM) Hybrid System (THS) technology is expected to lead to a deterioration in Subaru’s product mix. This shift towards HEVs is part of the industry’s broader move towards more environmentally friendly vehicles, but it brings with it higher costs for Subaru, especially as the company strives to meet stringent greenhouse gas (GHG) and corporate average fuel economy (CAFE) regulations. The company’s solid financial position, with revenue growth of 6.27% over the last twelve months and more cash than debt on its balance sheet, could help weather this transition.
The forecasted downturn in profitability is also tied to Subaru’s upcoming full model change for the Outback internal combustion engine (ICE) model. This update, alongside the launch of new HEV versions for multiple models, including the Forester and Crosstrek, is expected to occur simultaneously with the Yajima Plant shutdown. JPMorgan analysts believe that this confluence of events will likely result in difficult operating conditions for Subaru in the short term.
Subaru has not yet released a statement regarding JPMorgan’s rating downgrade and price target adjustment. Investors and market watchers will be closely monitoring the company’s performance and response to these projected challenges.
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