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Optimism Surrounds Domestic Auto Industry Despite Challenges
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The Zacks Domestic Auto industry includes companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which provides employment to a large number of people — is at the forefront of innovation, courtesy of its nature and the transformation that it is going through. Several companies from the industry have engine and transmission plants, as well as conduct research and development (R&D) and testing. Industry players in the S&P 500 include General Motors (GM - Free Report) , Ford (F - Free Report) and PACCAR Inc. (PCAR - Free Report) .
Let’s take a look at the industry’s three major themes:
While the domestic auto industry bore severe brunt of the coronavirus outbreak in the latter half of the first quarter and the second quarter, things are gradually starting to look up. Customers’ interest in car ownership is increasing as they remain keen on ensuring personal safety amid the pandemic. Automakers are stepping up efforts to ramp up e-commerce initiatives to stoke sales and adapt to the evolving buying patterns of customers. For instance, General Motors’ “Shop, Click, Drive” online program has been boosting sales of the company. The launch of simple, secure and user-friendly online platform is aiding the seamless end-to end digitization of companies’ sales process.
Carmakers are resorting to cost-containment initiatives and are drawing down their credit lines to preserve cash. Slashing executive pay, dividends and capex, along with imposing a hiring freeze are becoming commonplace. These are constructive measures to boost the firms’ cash position and preserve financial flexibility in the face of rising global market uncertainty due to the coronavirus-induced crisis. As it is, the fear of a spike in coronavirus infections looms large. So, these cost-cut efforts may aid margins of the firms in such challenging times. On a positive note, most auto companies are anticipating a sequential improvement in earnings in the upcoming quarter on the back of operational efficiency and gradual increase in vehicle demand.
Widespread usage of technology and rapid digitization are resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. Considering the changing dynamics, there has been a radical change in the business models of auto companies. With electric vehicle (EV) trends becoming hotter with each passing day, the auto giants are accelerating their EV game. Launches of various EV models by U.S. auto bigwigs including General Motors, Ford and Tesla are underway. While these are expected to enhance sales and profitability prospects of the firms, these may result in near-term spike in R&D costs.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Domestic Auto industry is a 12-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #33, which places it in the top 13% 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 strong 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Over the trailing three months, the industry’s earnings estimates have improved around 208%.
Before we present a few domestic auto stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector and S&P 500
The Domestic Auto industry has handily outperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 173% compared with the sector and S&P 500’s growth of 57.6% and 16.7%, respectively.
One-Year 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 28.49X compared with the S&P 500’s 12.78X and the sector’s 16.47X.
Over the past five years, the industry has traded as high as 28.49X, as low as 6.37X and at a median of 12.12X, as depicted in the chart below.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
Bottom Line
The reopening of economy, gradual increase in vehicle demand, focus on innovation, EV development and cost-containment efforts are inducing optimism in the industry. Automakers’ race to invest vast sums in the e-commerce platform is likely to gather steam and aid businesses to reach new heights. Companies that won’t be taking necessary efforts to step up their online game will be left behind. However, spike in coronavirus cases, fears of another round of lockdown and subsequent fall in demand remain concerns.
General Motors: This U.S. auto giant sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2020 earnings has moved up 61.5% to $2.44 per share over the past 30 days. It has a trailing four-quarter earnings surprise of 126.6%, on average. The company has a long-term estimated earnings growth rate of 9.9%.
Price and Consensus: GM
Polaris Inc. (PII - Free Report) : Minnesota-based Polaris designs and manufactures off-road and on-road vehicles. The consensus mark for this Zacks Rank #1 company’s 2020 earnings has risen 74% to $6.58 per share in the past 30 days. It has a trailing four-quarter earnings surprise of 16.1%, on average.
Price and Consensus: PII
Ford: The Zacks Consensus Estimate for fiscal 2021 earnings indicates a year-over-year improvement of 187.1%. The estimates have been revised 47.6% upward over the past 30 days. This Michigan-based auto giant currently carries a Zacks Rank #2 and has a long-term estimated earnings growth rate of 5.3%.
Price and Consensus: F
Fox Factory Holding Corp. (FOXF - Free Report) : Headquartered in California, the firm is a manufacturer and marketer of suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles, off-road vehicles, all-terrain vehicles, snowmobiles, specialty vehicles and applications and motorcycles. The Zacks Consensus Estimate for fiscal 2021 earnings for this Georgia-based automaker indicates a year-over-year improvement of 24.7%. The estimates have moved 17.8% north over the past 30 days. This Zacks Ranked #2 company has a long-term estimated earnings growth rate of 13.9%. It has a trailing four-quarter earnings surprise of 19.9%, on average.
Price and Consensus: FOXF
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Optimism Surrounds Domestic Auto Industry Despite Challenges
The Zacks Domestic Auto industry includes companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which provides employment to a large number of people — is at the forefront of innovation, courtesy of its nature and the transformation that it is going through. Several companies from the industry have engine and transmission plants, as well as conduct research and development (R&D) and testing. Industry players in the S&P 500 include General Motors (GM - Free Report) , Ford (F - Free Report) and PACCAR Inc. (PCAR - Free Report) .
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Solid Prospects
The Zacks Domestic Auto industry is a 12-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #33, which places it in the top 13% 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 strong 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Over the trailing three months, the industry’s earnings estimates have improved around 208%.
Before we present a few domestic auto stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Tops Sector and S&P 500
The Domestic Auto industry has handily outperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 173% compared with the sector and S&P 500’s growth of 57.6% and 16.7%, respectively.
One-Year 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 28.49X compared with the S&P 500’s 12.78X and the sector’s 16.47X.
Over the past five years, the industry has traded as high as 28.49X, as low as 6.37X and at a median of 12.12X, as depicted in the chart below.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
Bottom Line
The reopening of economy, gradual increase in vehicle demand, focus on innovation, EV development and cost-containment efforts are inducing optimism in the industry. Automakers’ race to invest vast sums in the e-commerce platform is likely to gather steam and aid businesses to reach new heights. Companies that won’t be taking necessary efforts to step up their online game will be left behind. However, spike in coronavirus cases, fears of another round of lockdown and subsequent fall in demand remain concerns.
Below we are presenting two stocks with a Zacks Rank #1 (Strong Buy) and two others with a Zacks Rank #2 (Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank stocks here.
General Motors: This U.S. auto giant sports a Zacks Rank #1. The Zacks Consensus Estimate for the company’s 2020 earnings has moved up 61.5% to $2.44 per share over the past 30 days. It has a trailing four-quarter earnings surprise of 126.6%, on average. The company has a long-term estimated earnings growth rate of 9.9%.
Price and Consensus: GM
Polaris Inc. (PII - Free Report) : Minnesota-based Polaris designs and manufactures off-road and on-road vehicles. The consensus mark for this Zacks Rank #1 company’s 2020 earnings has risen 74% to $6.58 per share in the past 30 days. It has a trailing four-quarter earnings surprise of 16.1%, on average.
Price and Consensus: PII
Ford: The Zacks Consensus Estimate for fiscal 2021 earnings indicates a year-over-year improvement of 187.1%. The estimates have been revised 47.6% upward over the past 30 days. This Michigan-based auto giant currently carries a Zacks Rank #2 and has a long-term estimated earnings growth rate of 5.3%.
Price and Consensus: F
Fox Factory Holding Corp. (FOXF - Free Report) : Headquartered in California, the firm is a manufacturer and marketer of suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles, off-road vehicles, all-terrain vehicles, snowmobiles, specialty vehicles and applications and motorcycles. The Zacks Consensus Estimate for fiscal 2021 earnings for this Georgia-based automaker indicates a year-over-year improvement of 24.7%. The estimates have moved 17.8% north over the past 30 days. This Zacks Ranked #2 company has a long-term estimated earnings growth rate of 13.9%. It has a trailing four-quarter earnings surprise of 19.9%, on average.
Price and Consensus: FOXF
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
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