The auto industry is a very important sector that reacts strongly to economic growth or economic slowdowns. For the month of July 2014, Total U.S. new motor vehicle sales came in at 1.43 million, a 9.1% increase compared to July 2013.
Although the economy seems to be at a point that is higher than pre-recession levels, auto sales are still in line to reach pre-recession levels only this year. So as the auto industry slowly returns to form, investors might want to focus on the best names in this space. Fortunately, there are several Zacks Rank #1 Stocks in the sector which may be intriguing buys to play off of this solid trend, such as the three companies highlighted below:
Zacks Top Ranked Auto Stocks
Tesla Motors (TSLA - Analyst Report)
We have ranked the ever-popular Tesla a Zacks Rank #1(strong buy) thanks to strong earnings estimate revisions for the current quarter and year. Tesla Motors reported strong revenue of $769 million in the second quarter beating their first quarter reported revenue of $620 million.
In spite of negative EPS (before non-recurring items), Tesla has beat earnings estimates with an average surprise of 74.44% for the past year so it will only be a matter of time until Tesla goes into the positives from this type of earnings look. Furthermore, in the pipeline, Tesla and Panasonic recently just announced their Gigafactory agreement which is a large-scale battery manufacturing facility and is on track for more than 35,000 deliveries in 2014.
Tesla has massive potential for growth in the future, especially in the alternative energy auto market, which is one of the biggest drivers for investors right now. Tesla will only be able to ride that wave for so long though, as more progress on the earnings front, and progress with new models, will be needed to justify their lofty valuation levels.
We have also given Nissan a Zacks Rank #1(strong buy) thanks to positive earnings revisions and an average positive surprise of 47.75% for the past four quarters. In the second quarter, Nissan reported strong sales of $24.2 billion and a net income of $1.1 billion giving an EPS of .54 and a 22.73% positive surprise. Shares are currently trading at $19.59, up about 1.03% for the day.
Nissan is the largest of the three stocks in this article, and is on the right path to gain market share against the US big three (GM, Ford, and DaimlerChrysler). In order to do this, Nissan has established a plan for alternative-energy and hybrid vehicle to try and gain market share in the renewable energy auto market.
Nissan’s challenges will be including volatility in prices of steel and aluminum in terms of exchange rates along with potential appreciation of the Yen against the US dollar making sales in the US less valuable to Nissan.
Tata Motors (TTM - Snapshot Report)
Analysts have ranked Tata motors #1(strong buy) given strong positive earnings estimate revisions. Tata is nearing all-time highs after a positive earnings report for their first quarter (FY 15) and is currently trading at $45.49 per share. Revenue was reported at $7.2 billion with a net income of $925 million after taxes.
The strong second quarter was supported by continuing favorable macroeconomic conditions with solid growth in the US and UK with continuing growth in China, a key market for Tata. It is also worth noting that Tata had retail volumes increase by 22% since last year same period with Jaguar up 12% and Land Rover up 24%.
The company continues to invest significantly in capital expenditure and R&D and has indicated capital spending will be in the region of $4.68 million to $4.94 million for FY15. The United States experienced a strong rebound after the weather-related disruption in Q1 and recovery in Europe remains slower but growth in sales in Europe have grown to 13.4% YoY.
While Tata is showing great dependence and reaction to economic climates across the world, they are eagerly looking for strategies to limit the volatility of sales in this cyclical industry, while still tapping into quickly growing emerging markets.
Key statistics and Comparables
Since all three have top ranks and are looking great from an earnings estimate revision perspective, let’s look at some key ratios in order to differentiate the members of this group. The forward P/E ratio for Tesla Motors, Nissan, and Tata are 78.52, 12.8, and 9.81 respectively, indicating that Tata is the best bang for your buck considering the future one year annual estimate of EPS.
If we look at Price/Sales (ttm) ratio we see a pretty similar story of Tesla being overpriced compared to Nissan and Tata Motors. The P/S (ttm) ratios for Tesla, Nissan, and Tata are, respectively, 13.40, .39, and .70 indicating a high price to pay for Tesla and a relatively good bargain for Nissan and Tata, with Nissan being the better of the two.
The PEG ratio tends to tell a different, yet still informative, story on overvalued and undervalued stocks and the PEG ratio (5 year expected) for Tesla, Nissan, and Tata are, respectively, 4.88, .74, and N/A. This is indicating that Nissan investors are not fully valuing the stock to its deserved growth rate and Tesla investors are paying for a rich valuation right now.
Finally, if we look at profit margin as of today investors receive some more interesting information regarding how these three stack up. The profit margins for Tesla, Nissan, and Tata are -6.83%, 3.91%, and 7.06%, respectively, indicating the inefficient return on sales for Tesla, but Nissan and Tata having similar returns on sales showing solid return on sales.
Investors and mainstream media love Tesla right now while Nissan and Tata continue their strong and steady growth in the auto industry. These key ratios only tell the statistical side of the story and the fundamental analysis of each stock, but discovering what these companies have in the pipeline for future growth is very hard to tell, and all of us will have to wait and see on that front.
These three auto industry stocks have different aspects to bring to the table, but they are all strong buys. Whether that is Tata’s stronger growing presence in Europe and Asia, Nissan’s move to becoming a big player in the auto alternative energy market, or Tesla’s potential to change how alternative energy cars are used, it is important to see why these stocks could have a good ROI.
The auto industry is a cyclical business that heavily depends on consumer prosperity and economic climate, and it is important for investors to look at the bigger picture of what drives growth for the auto industry rather than hard numbers on these companies' balance sheets.
Nevertheless, these three auto industry stocks outlined above have had strong earnings estimate revisions, and given the solid position of the sector right now, these could really be in the driver’s seat for investor portfolios in the near term.
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