Domestic Auto industry is set to flourish on the back of optimism led by vaccine developments and stimulus package. As it is, private transportation — which is the need of the hour — is fueling the demand for vehicles and boosting automakers’ prospects.
The race to invest vast sums in the digital platform is gathering steam and aiding the industry to reach new heights. Focus on innovation, electric vehicle (EV) development and cost-containment efforts are also inducing optimism in the industry. Companies like
Tesla ( TSLA Quick Quote TSLA - Free Report) , General Motors ( GM Quick Quote GM - Free Report) , Ford ( F Quick Quote F - Free Report) and PACCAR Inc. ( PCAR Quick Quote PCAR - Free Report) seem well placed to capitalize on the changing industry dynamics. Industry Overview
The Zacks Domestic Auto industry includes companies that are engaged in 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 and testing.
3 Trends Shaping Domestic Auto Industry : The Domestic Auto industry, being highly consumer cyclical, is dependent on business cycles and economic conditions. Since third-quarter 2020, things have been looking up for the industry on the back of preferred personal mobility and easier credit conditions. The momentum is expected to continue as consumers remain optimistic amid the availability of vaccines and $900-billion coronavirus relief package. The eventual reopening of the economy backed by these positive developments will have a favorable impact on consumer spending and help drive the Domestic Auto industry. Economic Recovery on the Horizon : A host of factors such as pollution issues, technical superiority, stricter fuel-emission standards, and increasing adoption by both automakers and customers have turned the fortunes in favor of green vehicles. With e-mobility trends becoming hotter with each passing day, auto giants are accelerating their EV game. In addition to EV king Tesla, other legacy U.S. automakers including General Motors and Ford are pouring billions of dollars in EV technology and development. Various EV launches are scheduled for this year amid the rising popularity of such vehicles. EV strides of the firms are expected to enhance sales and profitability prospects. EVs Getting Mainstream : 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. The launch of a simple, secure and user-friendly online platform is aiding seamless end-to end digitization of companies’ sales process. Thanks to the coronavirus pandemic, automakers truly embraced the potential of digital commerce this year and have been benefiting from the same amid the milieu of social distancing. E-commerce Activities on a Roll Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Automotive – Domestic industry is a 13-stock group within the broader Zacks
Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #19, which places it in the top 7% of around 250 Zacks industries.
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. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Over the past six months, the industry’s earnings estimates for 2021 have moved up 32.7%.
Before we present a few 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 & S&P 500
The Domestic Auto industry has outperformed both the sector and Zacks S&P 500 composite over the past year. Over this period, the industry has rallied a whopping 257.1%, handily surpassing the sector and S&P 500’s increase of 85.8% and 17.7%, 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. 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 the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 44.8X compared with the S&P 500’s 17.02X and the sector’s trailing12-month EV/EBITDA of 19.68X.
Over the past five years, the industry has traded as high as 44.8X, as low as 6.16X and at a median of 11.85X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio 4 Promising Bets Tesla: Tesla is the market leader in battery-powered electric car sales in the United States, owning around 60% of market share. The company has a first-mover advantage in the e-mobility space with high range vehicles, superior technology and software edge. Robust production levels from the Shanghai Gigafactory bode well for its future growth. The company carries a Zacks Rank #3 (Hold) and has long-term expected EPS growth of 32.9%. The Zacks Consensus Estimate for 2021 sales indicates year-on-year growth of 40.5%. The company has an excellent earnings surprise history, having topped estimates in each of the trailing four quarters. Price & Consensus: TSLA General Motors: One of the world’s largest automakers, General Motors leads the U.S. market share, having accounted for around 17% of the industry’s total sales in 2019. Domiciled in Detroit, its hot-selling brands in America like Chevrolet Silverado and Equinox, along with upcoming EV launches including GMC Hummer and Cadillac Lyriq are expected to boost the firm’s prospects. A strong automotive liquidity of $37.8 billion instills confidence. The company carries a Zacks Rank #3 and has long-term expected EPS growth of 9.9%. The Zacks Consensus Estimate for 2021 sales suggests year-on-year growth of 10.2%. It has an excellent earnings surprise history, having topped estimates in each of the trailing four quarters. Price & Consensus: GM Ford: Based in Michigan, Ford is another chief automaker of the United States. Focus on SUVs and trucks along with the upcoming EV launches — including Mustang Mach E — offers growth visibility. Strong capital discipline and operational efficiency helped the firm to turn to positive free cash flow (FCF) in the last reported quarter ($6.3 billion) against negative FCF of $5.3 billion in second-quarter 2020. Strong liquidity of the firm is a major positive amid coronavirus-led financial crisis. The company currently carries a Zacks Rank #3 and has long-term EPS growth projection of 5.8%. The Zacks Consensus Estimate for 2021 sales implies year-over-year growth of 22.2%. Price & Consensus: F PACCAR Inc. ( PCAR Quick Quote PCAR - Free Report) : Headquartered in Bellevue, PACCAR is a leading manufacturer of heavy-duty trucks in the world. The company’s investment in next-generation technology across its range of industry-leading transport solutions bodes well. PACCAR’s leading brands namely Kenworth, Peterbilt and DAF, along with balance sheet strength and investor-friendly moves are major tailwinds. The company carries a Zacks Rank #3 and has long-term expected EPS growth of 10%. The consensus mark for 2021 revenues points to year-over-year growth of 21.4%. It managed to surpass earnings estimates in three of the trailing four quarters and missed once, with an average surprise of 10.4%. Price & Consensus: PCAR
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