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4 Foreign Auto Stocks Braving Multiple Industry Headwinds
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The prospects of Zacks Automotive – Foreign industry look bleak as the market is reeling under semiconductor supply shortfall. Various auto biggies across the globe are battling chip deficit, which is hindering their business operations and forcing them to idle production lines. Rising infections of delta variant in various key markets are adding to the woes. Meanwhile, the electric vehicle (EV) market is growing prolifically, with advanced technology being leveraged more than ever before. Industry participants like Toyota Motor (TM - Free Report) , Daimler AG , CNH Industrial (CNHI - Free Report) and XPeng Inc. (XPEV - Free Report) are poised to fend off broader headwinds and witness long-term benefits amid rising EV popularity.
About the Industry
Companies in the Zacks Automotive – Foreign industry are involved in designing, engineering, manufacturing, distributing, and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycle and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. Widespread usage of technology is resulting in fundamental restructuring of the market. Stricter emission and fuel-economy targets, ramp up of charging infrastructure, and supportive government policies are boosting sales of green vehicles. With almost all firms heating up their electrification game, competition is getting stronger with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency along with low-emission technology.
Key Themes Influencing the Industry
China Auto Market Rebound Falters: Vehicle sales in China — the world’s largest auto market — dipped 3% year over year to 2.13 million units in May, snapping a 13-month winning streak. This was followed by another 12.4% year-over-year decline to 2.02 million units in June. The country, which was spearheading the global auto industry's recovery from coronavirus blues, has been hit badly by shortage of semiconductor supply. Global chip crunch has resulted in manufacturing delays and rising commodity prices, thereby affecting overall vehicle sales of the country. With industry experts not expecting microchip supply to return to normal levels until late this year, outlook for the China auto market doesn’t appear much sanguine.
Bold EV Targets Spell Opportunities & Troubles: Nations and regions have been accelerating their EV targets amid heightening climate concerns. The European Commission recently announced plans to phase out new petrol and diesel cars by 2035. China intends to ban fossil fuel cars and sell only new energy vehicles by 2035. Japan will scrap the sale of gasoline-powered cars by mid-2030s. California will ban the sale of new ICE cars effective 2035, and ensure 100% new car and truck sales to be electric by 2035 and 2045, respectively. While the EV market will provide abundant opportunities for automakers, it will also escalate capex and R&D expenses, thereby putting pressure on near-term cash flows and margins.
Rising Delta Variant Compounds Chip Concerns: The Delta variant, first found in India, is rapidly spreading to other parts of the world. Per Oxford Economics’ latest research note, the number of economies reporting the delta variant jumped to 89. France, Netherlands and Spain announced new restrictions in order to curb rising cases of the highly contagious delta variant. Rising infections in Europe, Japan, India and other key auto markets pose threats. While coronavirus vaccinations have become ubiquitous, fresh delta variant cases are simply adding to the woes of the industry that is reeling under semiconductor shortage. The chip crisis is expected to cost the global automotive industry $110 billion in revenues in 2021, per AlixPartners. Goldman Sachs expects chip dearth to wipe $20 billion off global carmakers’ operating profit this year.
Zacks Industry Rank Signals Dim Prospects
The Zacks Automotive – Foreign industry is a 22-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #190, which places it in the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since June-end, the industry’s earnings estimates for 2021 have moved down 4.4%.
Despite the downbeat mood in the industry, we will highlight some stocks that are well positioned to gain amid the prevailing challenges. But before that, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector, Outpaces S&P 500
The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector but outperformed the Zacks S&P 500 composite over the past year. The industry has witnessed growth of 48.2% compared with the S&P 500 and sector’s rise of 37.5% and 50.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
Since automotive companies are debt laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.42X compared with the S&P 500’s 17.93X and the sector’s 16.24X.
Over the past five years, the industry has traded as high as 10.71X, as low as 5.32X and at a median of 6.71X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks Set to Defy Industry Challenges
CNH Industrial: Headquartered in London, CNH Industrial’s products range from tractors to trucks and buses along with powertrain solutions for off and on-road vehicles. The firm’s five-year 2020-2024 business plan ‘Transform 2 Win’, aimed at operational efficiency through targeted restructuring efforts, bodes well. Upgraded product offerings will aid the company in achieving new business contracts. A spree of buyouts including Potenza Technology, ATI Inc and K-Line Ag, four businesses of CEG, and minority stakes in Bennamann and Augmenta offer growth visibility. CNH Industrial's impending takeover of Raven in a $2.1-billion deal will boost prospects. The firm currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 303.6% and 20.6%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CNHI
Daimler: Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans as well as buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The company’s investment plan of more than 70 billion euros ($85 billion) from 2021 through 2025 underscores its efforts to rev up electrification and digitization game targeted at achieving the desired level of profitability. Daimler’s collaborations with other key automakers for production of hydrogen fuel cells for use in heavy-duty big rigs or development of high-performance public charging stations in Europe are praiseworthy. The stock currently carries a Zacks Rank #2 (Buy). The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 265.6% and 3.7%, respectively.
Price & Consensus: DDAIF
XPeng: This rising star of China’s EV market has managed to garner massive investor attention since its IPO last year. The firm is poised for speedy sales growth, thanks to soaring popularity of the existing EV models including G3 SUV and P7 sedan. In addition to vehicle sales, XPeng also generates revenues from after-sales services, and ride-hailing and supercharging services. We expect XPeng’s commitment to innovation and continuous R&D spending to bolster its standing in the market and fortify its EV game. With the mission of bringing Smart EVs in the China auto market through continuous innovation in core vehicle systems, driverless technology and smart connectivity, this Zacks Rank #2 company is set to become a name to reckon with in the coming years. The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 40.9% and 58.8%, respectively.
Price & Consensus: XPEV
Toyota: Japan’s auto giant Toyota was the world’s top-selling carmaker in 2020. The expanding portfolio of product lines and a robust lineup of trucks and sport utility vehicles offer ample growth visibility. To capitalize on the accelerated global shift to electric cars, the auto giant is deepening focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness. Collaboration with Subaru and Mazda over EVs, and partnership with Hino to manufacture a heavy-duty hydrogen fuel cell electric truck augur well. Toyota, which currently carries a Zacks Rank #3 (Hold), aims to generate 40% of global sales from electric vehicles by 2025 and 70% by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 11.8% and 5.9%, respectively.
Price & Consensus: TM
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4 Foreign Auto Stocks Braving Multiple Industry Headwinds
The prospects of Zacks Automotive – Foreign industry look bleak as the market is reeling under semiconductor supply shortfall. Various auto biggies across the globe are battling chip deficit, which is hindering their business operations and forcing them to idle production lines. Rising infections of delta variant in various key markets are adding to the woes. Meanwhile, the electric vehicle (EV) market is growing prolifically, with advanced technology being leveraged more than ever before. Industry participants like Toyota Motor (TM - Free Report) , Daimler AG , CNH Industrial (CNHI - Free Report) and XPeng Inc. (XPEV - Free Report) are poised to fend off broader headwinds and witness long-term benefits amid rising EV popularity.
About the Industry
Companies in the Zacks Automotive – Foreign industry are involved in designing, engineering, manufacturing, distributing, and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycle and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. Widespread usage of technology is resulting in fundamental restructuring of the market. Stricter emission and fuel-economy targets, ramp up of charging infrastructure, and supportive government policies are boosting sales of green vehicles. With almost all firms heating up their electrification game, competition is getting stronger with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency along with low-emission technology.
Key Themes Influencing the Industry
China Auto Market Rebound Falters: Vehicle sales in China — the world’s largest auto market — dipped 3% year over year to 2.13 million units in May, snapping a 13-month winning streak. This was followed by another 12.4% year-over-year decline to 2.02 million units in June. The country, which was spearheading the global auto industry's recovery from coronavirus blues, has been hit badly by shortage of semiconductor supply. Global chip crunch has resulted in manufacturing delays and rising commodity prices, thereby affecting overall vehicle sales of the country. With industry experts not expecting microchip supply to return to normal levels until late this year, outlook for the China auto market doesn’t appear much sanguine.
Bold EV Targets Spell Opportunities & Troubles: Nations and regions have been accelerating their EV targets amid heightening climate concerns. The European Commission recently announced plans to phase out new petrol and diesel cars by 2035. China intends to ban fossil fuel cars and sell only new energy vehicles by 2035. Japan will scrap the sale of gasoline-powered cars by mid-2030s. California will ban the sale of new ICE cars effective 2035, and ensure 100% new car and truck sales to be electric by 2035 and 2045, respectively. While the EV market will provide abundant opportunities for automakers, it will also escalate capex and R&D expenses, thereby putting pressure on near-term cash flows and margins.
Rising Delta Variant Compounds Chip Concerns: The Delta variant, first found in India, is rapidly spreading to other parts of the world. Per Oxford Economics’ latest research note, the number of economies reporting the delta variant jumped to 89. France, Netherlands and Spain announced new restrictions in order to curb rising cases of the highly contagious delta variant. Rising infections in Europe, Japan, India and other key auto markets pose threats. While coronavirus vaccinations have become ubiquitous, fresh delta variant cases are simply adding to the woes of the industry that is reeling under semiconductor shortage. The chip crisis is expected to cost the global automotive industry $110 billion in revenues in 2021, per AlixPartners. Goldman Sachs expects chip dearth to wipe $20 billion off global carmakers’ operating profit this year.
Zacks Industry Rank Signals Dim Prospects
The Zacks Automotive – Foreign industry is a 22-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #190, which places it in the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since June-end, the industry’s earnings estimates for 2021 have moved down 4.4%.
Despite the downbeat mood in the industry, we will highlight some stocks that are well positioned to gain amid the prevailing challenges. But before that, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector, Outpaces S&P 500
The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector but outperformed the Zacks S&P 500 composite over the past year. The industry has witnessed growth of 48.2% compared with the S&P 500 and sector’s rise of 37.5% and 50.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
Since automotive companies are debt laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.42X compared with the S&P 500’s 17.93X and the sector’s 16.24X.
Over the past five years, the industry has traded as high as 10.71X, as low as 5.32X and at a median of 6.71X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks Set to Defy Industry Challenges
CNH Industrial: Headquartered in London, CNH Industrial’s products range from tractors to trucks and buses along with powertrain solutions for off and on-road vehicles. The firm’s five-year 2020-2024 business plan ‘Transform 2 Win’, aimed at operational efficiency through targeted restructuring efforts, bodes well. Upgraded product offerings will aid the company in achieving new business contracts. A spree of buyouts including Potenza Technology, ATI Inc and K-Line Ag, four businesses of CEG, and minority stakes in Bennamann and Augmenta offer growth visibility. CNH Industrial's impending takeover of Raven in a $2.1-billion deal will boost prospects. The firm currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 303.6% and 20.6%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CNHI
Daimler: Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans as well as buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The company’s investment plan of more than 70 billion euros ($85 billion) from 2021 through 2025 underscores its efforts to rev up electrification and digitization game targeted at achieving the desired level of profitability. Daimler’s collaborations with other key automakers for production of hydrogen fuel cells for use in heavy-duty big rigs or development of high-performance public charging stations in Europe are praiseworthy. The stock currently carries a Zacks Rank #2 (Buy). The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 265.6% and 3.7%, respectively.
Price & Consensus: DDAIF
XPeng: This rising star of China’s EV market has managed to garner massive investor attention since its IPO last year. The firm is poised for speedy sales growth, thanks to soaring popularity of the existing EV models including G3 SUV and P7 sedan. In addition to vehicle sales, XPeng also generates revenues from after-sales services, and ride-hailing and supercharging services. We expect XPeng’s commitment to innovation and continuous R&D spending to bolster its standing in the market and fortify its EV game. With the mission of bringing Smart EVs in the China auto market through continuous innovation in core vehicle systems, driverless technology and smart connectivity, this Zacks Rank #2 company is set to become a name to reckon with in the coming years. The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 40.9% and 58.8%, respectively.
Price & Consensus: XPEV
Toyota: Japan’s auto giant Toyota was the world’s top-selling carmaker in 2020. The expanding portfolio of product lines and a robust lineup of trucks and sport utility vehicles offer ample growth visibility. To capitalize on the accelerated global shift to electric cars, the auto giant is deepening focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness. Collaboration with Subaru and Mazda over EVs, and partnership with Hino to manufacture a heavy-duty hydrogen fuel cell electric truck augur well. Toyota, which currently carries a Zacks Rank #3 (Hold), aims to generate 40% of global sales from electric vehicles by 2025 and 70% by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 11.8% and 5.9%, respectively.
Price & Consensus: TM