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Auto Equipment Outlook: Technological & Cost Barriers Ahead
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The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering and suspension and brakes.
Let’s take a look at the industry’s three major themes:
Emerging economies such as Brazil, India and China as well as newer markets of Asia, Middle East and Africa hold significant growth opportunities for equipment manufacturers. Of late, industry players are partnering with local players across emerging markets to remain on par with region-specific technological developments, without making huge investments.
The addition of new technologies like digitization, automation and artificial intelligence has increased complexity in the working mechanism of automotive components. These complications require high-priced aftersales services, thereby creating new opportunities for auto equipment manufacturers to capitalize on. Apart from volume growth, providing repair and maintenance services for equipment already sold is likely to drive profits of the players.
With the technology revolution in full swing, equipment manufacturers have to develop components that comply with emission standards, and match the requirements of autonomous and electric vehicles. These new features, upgrades and component design require ample capital, time and labor. From a future competitive standpoint, the equipment manufacturing companies have to focus on technology that offers the best value in a short span of time to market.
Zacks Industry Rank Shows Weak Prospects
The Zacks Automotive - Original Equipment industry is a 41-stock group within the broader within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #224, which places it in the bottom 12% of approximately 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 weak 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. Over the past year, the industry’s earnings estimate for the current year has moved down 23%.
Despite the industry’s bleak near-term view, we will present a few auto original equipment stocks that one can consider. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has lagged the broader Auto sector as well as the Zacks S&P 500 composite. The industry has declined 20% over this period compared with the S&P 500’s rise of 10.8% and broader sector’s fall of 14.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing auto stocks, the industry is currently trading at 5.65X, lower than the S&P 500’s 10.96X. Additionally, the industry’s figure is below the sector’s trailing-12-month EV/EBITDA of 8.85X.
Over the past five years, the industry has traded as high as 11.32X, as low as 4.62X and at a median of 7.11X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The industry’s success depends on how well the players manage mounting costs owing to mass manufacturing and evolving technology. Also, the ability of the industry to comply with the new emission norms is a challenge. However, growing demand from the emerging economies is a tailwind.
Also, repair and maintenance service requirements for managing component complexities provide monetizing opportunity for the equipment manufacturers. Some top-ranked stocks in the Zacks Original Equipment space are Magna International (MGA - Free Report) , Commercial Vehicle Group, Inc. (CVGI - Free Report) and Meritor, Inc. , each of which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Magna International: The Zacks Consensus Estimate for the current-year EPS of this Canadian supplier of automotive components has moved 1.3% north over the past 60 days. Over the past three months, shares of Magna have increased 7.1%.
Price and Consensus: MGA
Commercial Vehicle Group: The consensus EPS estimate for this products and systems supplier to the global commercial vehicle market has not seen any revision for the current year in the last 60 days. CVG’s stock has rallied 30.4% over the past three months.
Price and Consensus: CVGI
Meritor: The consensus EPS estimate for this Troy, MI-based global automotive parts manufacturer and supplier has not witnessed any revision revised for the current fiscal year over the last 60 days. Over the past three months, the company’s stock has increased 22.4%.
Price and Consensus: MTOR
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Auto Equipment Outlook: Technological & Cost Barriers Ahead
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering and suspension and brakes.
Some prominent players within the industry are BorgWarner Inc. (BWA - Free Report) , Adient PLC (ADNT - Free Report) , WABCO Holdings and Continental AG (CTTAY - Free Report) .
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Shows Weak Prospects
The Zacks Automotive - Original Equipment industry is a 41-stock group within the broader within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #224, which places it in the bottom 12% of approximately 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 weak 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. Over the past year, the industry’s earnings estimate for the current year has moved down 23%.
Despite the industry’s bleak near-term view, we will present a few auto original equipment stocks that one can consider. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has lagged the broader Auto sector as well as the Zacks S&P 500 composite. The industry has declined 20% over this period compared with the S&P 500’s rise of 10.8% and broader sector’s fall of 14.2%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing auto stocks, the industry is currently trading at 5.65X, lower than the S&P 500’s 10.96X. Additionally, the industry’s figure is below the sector’s trailing-12-month EV/EBITDA of 8.85X.
Over the past five years, the industry has traded as high as 11.32X, as low as 4.62X and at a median of 7.11X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The industry’s success depends on how well the players manage mounting costs owing to mass manufacturing and evolving technology. Also, the ability of the industry to comply with the new emission norms is a challenge. However, growing demand from the emerging economies is a tailwind.
Also, repair and maintenance service requirements for managing component complexities provide monetizing opportunity for the equipment manufacturers. Some top-ranked stocks in the Zacks Original Equipment space are Magna International (MGA - Free Report) , Commercial Vehicle Group, Inc. (CVGI - Free Report) and Meritor, Inc. , each of which currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Magna International: The Zacks Consensus Estimate for the current-year EPS of this Canadian supplier of automotive components has moved 1.3% north over the past 60 days. Over the past three months, shares of Magna have increased 7.1%.
Price and Consensus: MGA
Commercial Vehicle Group: The consensus EPS estimate for this products and systems supplier to the global commercial vehicle market has not seen any revision for the current year in the last 60 days. CVG’s stock has rallied 30.4% over the past three months.
Price and Consensus: CVGI
Meritor: The consensus EPS estimate for this Troy, MI-based global automotive parts manufacturer and supplier has not witnessed any revision revised for the current fiscal year over the last 60 days. Over the past three months, the company’s stock has increased 22.4%.
Price and Consensus: MTOR
Is Your Investment Advisor Fumbling Your Financial Future?
See how you can more effectively safeguard your retirement with a new Special Report, “4 Warning Signs Your Investment Advisor Might Be Sabotaging Your Financial Future.”
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