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2 Promising Foreign Auto Stocks Amid Industry Challenges
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The Zacks Automotive – Foreign industry is battling a global shortage of semiconductor supply — a byproduct of COVID-19 — which only got worsened by the Russia-Ukraine war. Vehicle sales are declining across all major foreign markets amid the chip crunch.Vehicle sales are plummeting across all major foreign markets, including China and Europe.Manufacturing inefficiencies, high commodity costs, and escalating capex and research & development (R&D) costs for the development of electric vehicles (EVs) are likely to further dent margins.
The fact that manufacturers are successfully managing to pass the rising costs of production to consumers by charging high prices for vehicles is a bright spot. Rising vehicle prices are offsetting the decline in sales volumes and the trend is most likely to continue in the near term. Two stocks that seem to be braving the multiple challenges surrounding the industry are Mercedes-Benz Group AG and Li Auto (LI - Free Report) .
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in fundamental restructuring of the market. Stricter emission and fuel-economy targets and ramp-up of charging infrastructure as well as supportive government policies are boosting sales of green vehicles. With almost all firms intensifying 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 technologies.
Key Themes Shaping the Industry
Chip Crisis Resulting in Manufacturing Inefficiencies: Just when industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the geopolitical conflict between Russia and Ukraine triggered a second round of global microchip shortage. In addition to the shortage of microchips, possibilities of escalation of supply shortage of other key components are also high, which is likely to limit production volumes. Additionally, industry participants are also battling high commodity and logistical costs amid supply chain disruptions.
Sluggish China Auto Market: Per China Association of Automobile Manufacturers (CAAM), total vehicle sales declined 6.6% year over year to 12.1 million units in the first six months of 2022. Apart from the chip crisis, the resurgence of lockdowns owing to rising COVID-19 inflections kept buyers away from showrooms and hurt car sales. Per CAAM’s deputy secretary-general, China's auto industry is likely to face persistent challenges of chip crunch and commodity inflation, especially for EV batteries. Discouragingly, CAAM cut its 2022 sales projection and now expects 3% growth this year, lower than 5% guided earlier. It now anticipates sales of commercial vehicles to fall 16% year over year to 4 million units.
Testing Times for Europe’s Auto Market: In a telling sign that the chip shortage is wreaking havoc on the auto industry, new passenger registrations in the European Union continued to slide downhill, slumping for the twelfth straight month in June. In fact, with 886,510 units sold, June registered the lowest sales volume on record since 1996. For the first half of 2022, new passenger car registrations in the EU slid 14% year over year. Over the same time period, the EU market for new light commercial vehicles tanked by 23.9% year over year. The road ahead is likely to be rough amid economic uncertainty and supply-chain disruptions.
Rise in Vehicle Prices: As inventory challenges are mounting amid the supply-demand imbalance, the average prices of vehicles are shooting up. With prices going through the roof, some customers are willing to pay a premium for their preferred vehicle. That’s a positive for automakers, as the high sales price of vehicles is somewhat offsetting the decline in volumes.
Zacks Industry Rank Signals Gloomy Prospects
The Zacks Automotive – Foreign industry is a 25-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #133, which places it in the bottom 47% 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 tepid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 March-end, average earnings estimates for 2022 have declined 15.6%.
Despite the downbeat industry scenario, we will highlight two 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 S&P 500 & Sector
The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has declined 30.7%, wider than the sector and S&P 500’s fall of 13.8% and 7.2%, 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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 9.28X compared with the S&P 500’s 12.80X and the sector’s 19.27X.
Over the past five years, the industry has traded as high as 10.59X, as low as 5.41X and at a median of 7.85X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Buy
Mercedes-Benz: Germany-based Mercedes-Benz develops and sells a wide range of premium and luxury vehicles. It also offers financing and leasing packages for retail customers and dealers. Additionally, it provides automotive insurance brokerage and banking services and digital services for charging and payment and mobility services. DDAIF’s collaborations with other key automakers for the development of high-performance public charging stations in Europe are praiseworthy. Mercedes-Benz is geared up for a tight race in the EV domain and plans to go all-electric by 2030-end. For the transition into a software-driven and carbon-free future, the company intends to invest more than 60 billion euros over 2022-2026.
DDAIF has a lineup of several new EV models, with the latest being Mercedes-AMG EQE, an electric luxury sedan, slated to go on sale in 2023. Over the past year, Mercedes has announced an onrush of new battery-powered vehicles, debuting with the EQS, its six-figure flagship, followed by the AMG EQS, a sportier version of the car developed by its performance division. The auto bigwig has placed its bets on the EQE model to bolster sales of EV units, as it looks to invest more in electric-only production platforms.
The Zacks Consensus for 2022 earnings has moved up 65 cents over the past seven days and implies year-over-year growth of 204.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DDAIF
Li Auto: Li Auto is positioned for growth as it continues to invest in extended-range EVs, advanced driver-assist systems (ADAS) and capacity expansion efforts. Focus on cost-effective SUVs is the core of LI’s business strategy. It was one of the first firms to successfully commercialize extended-range EVs, which require a relatively small battery pack. Li Auto’s flagship offering, Li One, is boosting the firm’s prospects.The cumulative deliveries of Li ONE total 194,913 since the vehicle made its debut in 2019.
China’s rising EV star also officially unveiled Li L9, the flagship smart SUV for families, in June. The vehicle is a six-seat, full-size flagship SUV, offering ample space and comfort for family users. It also boasts the company’s self-developed autonomous driving system, Li AD Max, and premium vehicle safety measures to protect every family passenger. The vehicle has a retail price of RMB459,800. Since its launch, it has received more than 30,000 orders, each with a basic refundable deposit of RMB5,000. Deliveries will be initiated by the end of August.The company continues to capitalize on the growing demand for EVs by expanding its retail footprint to 259 stores that are operational across 118 cities along with 226 servicing centers as of Jul 31.
The Zacks Consensus for 2022 sales implies year-over-year growth of 100%. Li Auto currently carries a Zacks Rank #2 and has a Growth Score of B.
Price & Consensus: LI
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2 Promising Foreign Auto Stocks Amid Industry Challenges
The Zacks Automotive – Foreign industry is battling a global shortage of semiconductor supply — a byproduct of COVID-19 — which only got worsened by the Russia-Ukraine war. Vehicle sales are declining across all major foreign markets amid the chip crunch.Vehicle sales are plummeting across all major foreign markets, including China and Europe.Manufacturing inefficiencies, high commodity costs, and escalating capex and research & development (R&D) costs for the development of electric vehicles (EVs) are likely to further dent margins.
The fact that manufacturers are successfully managing to pass the rising costs of production to consumers by charging high prices for vehicles is a bright spot. Rising vehicle prices are offsetting the decline in sales volumes and the trend is most likely to continue in the near term. Two stocks that seem to be braving the multiple challenges surrounding the industry are Mercedes-Benz Group AG and Li Auto (LI - Free Report) .
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in fundamental restructuring of the market. Stricter emission and fuel-economy targets and ramp-up of charging infrastructure as well as supportive government policies are boosting sales of green vehicles. With almost all firms intensifying 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 technologies.
Key Themes Shaping the Industry
Chip Crisis Resulting in Manufacturing Inefficiencies: Just when industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the geopolitical conflict between Russia and Ukraine triggered a second round of global microchip shortage. In addition to the shortage of microchips, possibilities of escalation of supply shortage of other key components are also high, which is likely to limit production volumes. Additionally, industry participants are also battling high commodity and logistical costs amid supply chain disruptions.
Sluggish China Auto Market: Per China Association of Automobile Manufacturers (CAAM), total vehicle sales declined 6.6% year over year to 12.1 million units in the first six months of 2022. Apart from the chip crisis, the resurgence of lockdowns owing to rising COVID-19 inflections kept buyers away from showrooms and hurt car sales. Per CAAM’s deputy secretary-general, China's auto industry is likely to face persistent challenges of chip crunch and commodity inflation, especially for EV batteries. Discouragingly, CAAM cut its 2022 sales projection and now expects 3% growth this year, lower than 5% guided earlier. It now anticipates sales of commercial vehicles to fall 16% year over year to 4 million units.
Testing Times for Europe’s Auto Market: In a telling sign that the chip shortage is wreaking havoc on the auto industry, new passenger registrations in the European Union continued to slide downhill, slumping for the twelfth straight month in June. In fact, with 886,510 units sold, June registered the lowest sales volume on record since 1996. For the first half of 2022, new passenger car registrations in the EU slid 14% year over year. Over the same time period, the EU market for new light commercial vehicles tanked by 23.9% year over year. The road ahead is likely to be rough amid economic uncertainty and supply-chain disruptions.
Rise in Vehicle Prices: As inventory challenges are mounting amid the supply-demand imbalance, the average prices of vehicles are shooting up. With prices going through the roof, some customers are willing to pay a premium for their preferred vehicle. That’s a positive for automakers, as the high sales price of vehicles is somewhat offsetting the decline in volumes.
Zacks Industry Rank Signals Gloomy Prospects
The Zacks Automotive – Foreign industry is a 25-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #133, which places it in the bottom 47% 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 tepid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 March-end, average earnings estimates for 2022 have declined 15.6%.
Despite the downbeat industry scenario, we will highlight two 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 S&P 500 & Sector
The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has declined 30.7%, wider than the sector and S&P 500’s fall of 13.8% and 7.2%, 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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 9.28X compared with the S&P 500’s 12.80X and the sector’s 19.27X.
Over the past five years, the industry has traded as high as 10.59X, as low as 5.41X and at a median of 7.85X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Buy
Mercedes-Benz: Germany-based Mercedes-Benz develops and sells a wide range of premium and luxury vehicles. It also offers financing and leasing packages for retail customers and dealers. Additionally, it provides automotive insurance brokerage and banking services and digital services for charging and payment and mobility services. DDAIF’s collaborations with other key automakers for the development of high-performance public charging stations in Europe are praiseworthy. Mercedes-Benz is geared up for a tight race in the EV domain and plans to go all-electric by 2030-end. For the transition into a software-driven and carbon-free future, the company intends to invest more than 60 billion euros over 2022-2026.
DDAIF has a lineup of several new EV models, with the latest being Mercedes-AMG EQE, an electric luxury sedan, slated to go on sale in 2023. Over the past year, Mercedes has announced an onrush of new battery-powered vehicles, debuting with the EQS, its six-figure flagship, followed by the AMG EQS, a sportier version of the car developed by its performance division. The auto bigwig has placed its bets on the EQE model to bolster sales of EV units, as it looks to invest more in electric-only production platforms.
The Zacks Consensus for 2022 earnings has moved up 65 cents over the past seven days and implies year-over-year growth of 204.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DDAIF
Li Auto: Li Auto is positioned for growth as it continues to invest in extended-range EVs, advanced driver-assist systems (ADAS) and capacity expansion efforts. Focus on cost-effective SUVs is the core of LI’s business strategy. It was one of the first firms to successfully commercialize extended-range EVs, which require a relatively small battery pack. Li Auto’s flagship offering, Li One, is boosting the firm’s prospects.The cumulative deliveries of Li ONE total 194,913 since the vehicle made its debut in 2019.
China’s rising EV star also officially unveiled Li L9, the flagship smart SUV for families, in June. The vehicle is a six-seat, full-size flagship SUV, offering ample space and comfort for family users. It also boasts the company’s self-developed autonomous driving system, Li AD Max, and premium vehicle safety measures to protect every family passenger. The vehicle has a retail price of RMB459,800. Since its launch, it has received more than 30,000 orders, each with a basic refundable deposit of RMB5,000. Deliveries will be initiated by the end of August.The company continues to capitalize on the growing demand for EVs by expanding its retail footprint to 259 stores that are operational across 118 cities along with 226 servicing centers as of Jul 31.
The Zacks Consensus for 2022 sales implies year-over-year growth of 100%. Li Auto currently carries a Zacks Rank #2 and has a Growth Score of B.
Price & Consensus: LI