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3 Domestic Auto Stocks in Fast Lane Despite Chip Crunch

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The Zacks Domestic Auto industry, being highly cyclical, is expected to thrive amid economic recovery buoyed by vaccination and stimulus optimism. Vehicle demand is on the rise, thanks to preference for personal mobility and easier credit conditions. Electric vehicles (EV) are getting mainstream with each passing day and are likely to buoy the prospects of automakers.

However, global microchip shortage is posing near-term hiccups for the companies in this space. Having said that, focus on innovation, increased electrification efforts and cost-containment efforts are set to benefit industry participants like Polaris (PII - Free Report) , Harley Davidson (HOG - Free Report) and Fox Factory (FOXF - Free Report) .

Key Investing Trends

Economic Recovery a Major Booster: The Domestic Auto industry, being highly consumer cyclical, is dependent on business cycles and economic conditions. Rising consumer spending, solid recovery of labor market, and robust consumer and business optimism instill confidence. The Department of Commerce reported that the U.S. economy jumped 6.4% in first-quarter 2021. Faster-than-expected recovery of the U.S. economy buoyed by nationwide COVID-19 vaccinations, unprecedented fiscal stimulus and an extremely accommodative Fed is driving the Domestic Auto industry. The momentum is expected to continue and demand for vehicles is likely to remain high amid preference for personal mobility, widespread vaccination drive, federal aid and reopening of activities.

EVs Continue to Gain Traction: Climate change concerns, technological advancement and stringent fuel-emission standards are increasing green vehicles’ adoption by both automakers as well as customers. With e-mobility trends becoming hotter with each passing day, auto giants are accelerating their EV game. In addition to EV king Tesla (TSLA - Free Report) , other legacy U.S. automakers including General Motors (GM - Free Report) , Ford (F - Free Report) , and PACCAR (PCAR - Free Report) are pouring billions of dollars in EV technology and development. Various EV launches are scheduled this year amid the rising popularity of such vehicles. EV strides of the firms are expected to enhance sales and profitability prospects.

Chip Shortfall Acting a Spoiler: Various auto biggies are grappling with semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines. Fire breakout at a Renesas Electronics chip plant in March exacerbated the chip famine. Amid acute shortage of semiconductor supply, many auto biggies have slashed their production and profit targets. For instance, Ford lowered its guidance and expects a $2.5 billion hit to earnings, thanks to the chip famine. General Motors has warned that 2021 pretax profits might take a $1.5-$2 billion hit. The concerted efforts that are being undertaken by the Biden administration, chipmakers and automakers to ease the microchip shortage will most likely provide long-term benefits but may not ease the current supply glitch soon.

Zacks Industry Rank Indicates Upbeat Prospects

The Zacks Automotive – Domestic industry is a 15-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #65, which places it in the top 26% of around 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2021 have moved up 21.7%.

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 Breezes Past 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 210.2%, handily surpassing the sector and S&P 500’s increase of 101.2% and 49.5%, 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 trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 40.62X compared with the S&P 500’s 17.06X and the sector’s trailing-12-month EV/EBITDA of 18.2X. Over the past five years, the industry has traded as high as 47.6X, as low as 6.73X and at a median of 11.9X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

Our Choices

Harley Davidson: Milwaukee, WI-based Harley Davidson is one the leading motorcycle makers. The company, under new CEO Jochen Zeitz, has been making aggressive efforts to revamp its product lineup that will better align with market trends. The firm's turnaround plan — dubbed as ‘Rewire’ — and five-year strategic plan ‘Hardwire’ boosts optimism. Per the plan, the motorcycle giant company remains focused on bolstering its market position by putting more emphasis on sportier bikes and the modern marketing strategy. Harley Davidson currently flaunts a Zacks Rank #1 (Strong Buy) and has long-term expected EPS growth of 22.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consenus: HOG

Fox Factory: Headquartered in California, Fox Factory 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 as well as applications and motorcycles. Sustained demand growth across the powersports industry and outdoor recreation is set to drive this Zacks Rank #1 company. Fox Factory’s robust backlog, innovative product pipeline, and strong revenue and growth visibility are likely to aid its performance going forward. The company has a long-term expected EPS growth of 17.5%. 

Price & Consenus: FOXF

Polaris: Minnesota-based Polaris designs, engineers, manufactures and markets power sports vehicles worldwide. It operates in five segments: ORV/Snowmobiles, Motorcycles, Global Adjacent Markets, Aftermarket and Boats. This Zacks Rank #2 (Buy) company is riding on strong retail demand across all businesses and the momentum is expected to continue. Polaris’ strong financials and plans to roll out its first green vehicle also bode well. The motorcycle and all-terrain vehicle maker recently announced plans to launch all-electric RANGER by year-end, with deliveries anticipated to begin in early 2022. The Zacks Consensus Estimate for 2021 earnings and sales suggests year-on-year growth of 18.2% and 19.3%, respectively.

Price & Consenus: PII

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