Automotive – Foreign industry is battling the global shortage of semiconductor supply. Vehicle sales are declining across all major foreign markets amid chip crunch. Companies are forced to slash production targets, which will limit their revenues. Manufacturing inefficiencies, high commodity costs, and escalating capex and research & development (R&D) costs for the development of electric vehicles (EVs) are likely to further dent margins. Nonetheless, two stocks — namely BYD Co Ltd ( BYDDY Quick Quote BYDDY - Free Report) and Stellantis ( STLA Quick Quote STLA - Free Report) — look poised to shine in an otherwise gloomy industry. Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing, distributing, and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. Widespread usage of technology is resulting in fundamental restructuring of the market. Stricter emission and fuel-economy targets, ramp up of charging infrastructure as well as supportive government policies are boosting sales of green vehicles. With almost all firms heating up their electrification game, competition is getting stronger with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency along with low-emission technologies.
3 Major Trends
Vehicle sales in China — the world’s largest auto market —declined 9.4% year over year to 2.33 million units in October, tumbling for the sixth consecutive month. While September and October are usually the peak sales months, the country was badly hit by microchip shortage this time around. The global chip crunch has resulted in manufacturing delays and rising commodity prices, thereby affecting overall vehicle sales of the country. With chip-related headwinds likely to persist till first-half 2022, prospects of the China auto market appear muted. China’s Auto Slump Continues: In a telling sign that chip shortage is wreaking havoc on the auto industry, new passenger registrations in the European Union tailed off 30.3% year over year in October, marking the fourth straight monthly decline. The auto sales picture in Japan is no different. Per the Japan Automobile Manufacturers Association, new vehicle sales in the country dipped 31.3% in October, tanking for the fourth straight month. The shortage of chips and components parts has prompted many auto bigwigs of the nation to idle factories and slash production. Its likely to be tough road ahead as supply-chain disruptions are not expected to abate anytime soon. Europe & Japan’s Sales Engine Slows Down:
The European Commission is set to phase out new petrol and diesel cars by 2035. China intends to ban fossil fuel cars and sell only new energy vehicles by 2035. Japan will scrap the sale of gasoline-powered cars by mid-2030s. California will ban the sale of new ICE cars effective 2035 and ensure 100% of new car and truck sales to be electric by 2035 and 2045, respectively. While the acceleration of EV targets will offer opportunities to automakers, it will also escalate capex and R&D expenses as they transition from ICE models. That would dent firms’ near-term cash flows and margins, which is all the more concerning when revenues are under pressure because of chip deficit. Aggressive EV Goals Both a Boon and a Bane: Zacks Industry Rank Signals Lackluster Prospects
The Zacks Automotive – Foreign industry is a 25-stock group within the broader Zacks
Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #196, which places it in the bottom 23% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since August, average earnings estimates for 2021 have declined 8.6%. Estimates for 2022 have also inched down 2.9% since August.
Despite the downbeat industry scenario, we will highlight two stocks that are well positioned to gain amid the prevailing challenges. But before that, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags S&P 500 & Sector
The Zacks Automotive – Foreign industry has underperformed the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has moved up 4.4% compared with the S&P 500 and sector’s rise of 30.3% and 19.1%, 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 7.33X compared with the S&P 500’s 15.83X and the sector’s 15.48X.
Over the past five years, the industry has traded as high as 10.6X, as low as 5.32X and at a median of 6.64X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks Standing Tall Amid Industry Challenges
Stellantis: Formerly Fiat Chrysler Automobiles, Stellantis manufactures and sells passenger vehicles, pickup trucks, SUVs, and light commercial vehicles worldwide. Stellantis has become the world's fourth-largest carmaker though the merger of Fiat Chrysler and France's PSA earlier this year. This Netherlands-based company currently has 14 brands under its name. The popular ones include Peugeot, RAM, Citroen, Fiat, Chrysler, Jeep, Maserati and Alfa Romeo. Stellantis targets to electrify all its 14 brands by 2030. It is committed to investing more than 30 billion euros ($35.54 billion) through 2025 for the electrification of its vehicle lineup. Collaborations with Samsung SDI and LG Energy Solution to rev up battery technology in North America bode well. The recent buyout of First Investors Financial Services Group will enable STLA to establish a captive financial arm in the United States.
Stellantis has a long-term expected EPS growth rate of 35.4%. The Zacks Consensus of 2021 and 2022 earnings implies year-over-year growth of 173.5% and 11%, respectively. The consensus mark for 2021 and 2022 revenues signals year-over-year growth of 83.7% and 4%, respectively. Shares of Stellantis have risen 18.7% over the past year. The stock currently flaunts a Zacks Rank #1 (Strong Buy).
Price & Consensus: STLA BYD: China-based BYD is principally engaged in the research, manufacture, and distribution of automobiles, secondary rechargeable batteries as well as mobile phone components. The company stands to benefit from robust demand for green vehicles and batteries in China. The firm’s rechargeable battery business provides lithium-ion and nickel batteries that are essential for the development of green vehicles. Backed by Warren Buffett’s Berkshire Hathaway, BYD is set to gain from its scale and government support. The rising deliveries of ‘Han’ and ‘Tang’ models are driving the firm’s top line. Solid execution capabilities and expansion efforts outside China, particularly in the European market, will further fuel the stock. The company’s revenues have been growing rapidly and unlike other pure EV players based in China, BYD has been making profits for years. The collaboration with Levo Mobility for the electrification of U.S. fleets augurs well.
BYD currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2021 earnings has been upwardly revised by a penny over the past 30 days to 52 cents per share. The consensus mark for 2022 earnings and sales implies year-over-year growth of 42.3% and 33%, respectively. Shares of BYD have rallied 66% over the past year.