Macquarie downgrades Subaru stock rating on pricing pressure

Macquarie has lowered its rating for Subaru Corp. stock to "Underperform" from "Neutral" due to concerns over pricing pressure and challenging U.S. market conditions. The investment firm reduced its price target for the stock from JPY2,200 to JPY2,000. Subaru reported a JPY1,263 billion revenue increase of 8% year-over-year and 1% quarter-over-quarter for the quarter, which was in line with expectations.

Operating profit rose 179% year-over-year and 73% quarter-over-quarter to JPY73 billion, exceeding estimates. However, a 2% decline in vehicle volume to 224,000 units impacted earnings. Favorable foreign exchange rates and lower warranty expenses contributed to improved earnings. Subaru's gross profit margin of 14% is a concern, as noted by InvestingPro analysis.

Management has maintained its full-year operating profit guidance of JPY150 billion, but expects only JPY34 billion in the second half, assuming JPY79 billion in headwinds. The firm believes the U.S. competitive environment is challenging, with the new Outback requiring heavy incentives despite having roughly 5% higher pricing. A cheaper entry grade is planned to address affordability issues.

Macquarie sees pricing and incentive pressure, along with limited scale, as structural constraints on medium-term margins, making the company's valuation premium difficult to justify. Despite these concerns, the stock appears undervalued at current levels, trading 25% below its 52-week high with a 18% year-to-date decline.