A good way to look for Value stock investment ideas is to find an industry that has been sold off by the market because of negative news or unfavorable economic conditions, then find the companies who are least subject to the negative conditions but were dragged down by their peers.
Automakers Take a Beating on Rates and Tariffs
The automotive industry has been hurting of late, hit by the 1-2 punch of rising interest rates and the imposition of U.S. tariffs on imported Steel and Aluminum. Rising interest rates increase the cost to the consumer of financing an automobile. Rising commodity prices increase the cost of producing automobiles which can either be borne by the automaker as an expense, or passed along to the consumer, making cars more expensive to buy.
How Much Do Rates Really Matter?
The interest rate component is likely overblown. Rates are still historically low, especially for automobile loans, which are still around 4%. Every 25 basis point increase in that rate adds about $8 - $20 to the payment on a new car. That’s hardly significant enough to deter almost anyone from purchasing a new car. The strength of the economy as a whole and record low levels of unemployment will have a much bigger impact.
General Motors (GM - Free Report) has been undeservedly battered in the recent selloff of auto stocks. Its price is off 15% YTD even as its Zack’s Consensus Earnings Estimate has been revised upward. It currently trades at a Forward P/E of 5.6X, versus the 7X of closest competitor Ford Motors (F - Free Report) and an industry average of 9.9X. It earns a Zack’s Rank #1 (Strong Buy), and a Zack’s Value Score of A. It also pays a 4.4% dividend, so a savvy investor is rewarded for waiting for the market to recognize the value in the stock.
Toyota Likely Unaffected by Metals Tariffs
Toyota Motor Corporation (TM - Free Report) also has a Zack’s Rank #1 (Strong Buy). At a forward P/E of 8.4X, it’s currently trading closer to the industry average than General Motors, but the Zack’s Consensus Earning’s Estimate for 2018 has been revised upward several times already this year from $11.97/share to $15.16 – an increase of 26%.
Additionally, though it manufactures automobiles globally, Toyota buys the vast majority of the steel and aluminum for the cars it produces in the U.S. from domestic suppliers, so it is not likely to suffer from the tariffs.
Big Truck Company Outpaces its Industry
Paccar (PCAR - Free Report) , maker of Kenworth, Peterbilt and DAF medium and heavy duty trucks has had 2018 earning estimates revised upward by 9 of the 11 analysts included in the Zack’s Consensus in the past 60 days. A year ago, Paccar was expected to earn $4.26/share, but that has been revised all the way up to $5.33.
Paccar is a Zack’s Rank #1 (Strong Buy). The strong economy should keep demand firm for heavy equipment (regardless of the rise in interest rates), and the tariffs shouldn’t affect this U.S. manufacturer.