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3 Domestic Auto Stocks in High Gear Despite Supply Chain Snarls
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The Zacks Domestic Auto industry is currently battling global chip famine, which is not expected to abate at least till first-half 2022. Vehicle sales of various auto majors are being weighed down by manufacturing inefficiencies and tight inventory. Nonetheless, the rising prices of vehicles are likely to have offset low volumes to a large extent. Meanwhile, companies are bearing the brunt of soaring commodity costs, which are set to dent margins. But there is one bright spot, i.e., the soaring deliveries of electric vehicles (EVs), which are becoming mainstream with each passing day and are likely to buoy the prospects of auto giants like Tesla (TSLA - Free Report) , Ford (F - Free Report) , and General Motors (GM - Free Report) .
About the Industry
The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and 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. Widespread usage of technology and rapid digitization are resulting in the fundamental restructuring of the automotive market. Several companies from the industry have engine and transmission plants and conduct research and development and testing of electric and autonomous vehicles.
Factors Influencing the Industry's Fate
Supply-Demand Mismatch: Although buyers’ appetite for personal vehicles is quite strong, the auto industry is struggling to meet the mounting demand owing to the global chip crunch. Various auto biggies are grappling with semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines. There are no signs of the easing of chip issues, at least till first-half 2022. Some experts expect the shortage to linger in 2023 as well.
Vehicle Prices Soaring: As inventory challenges are mounting amid supply-demand imbalance, the average prices of vehicles (both new and used) are shooting up. With prices going through the roof, some customers are willing to pay a premium for their preferred vehicle. That’s a positive for automakers, as the high sales price of vehicles is somewhat offsetting the decline in volumes. But then, there is another set of consumers that are not willing to pay a heavy premium and are waiting on the sidelines in the light of limited choice and high prices.
Love for Electric Cars: Climate change concerns, technological advancement and stringent fuel-emission standards are increasing green vehicles’ adoption by both automakers as well as customers. Legacy automakers are going the extra mile to gain a strong foothold in this red-hot e-mobility space. Demand for electric cars is off the charts. While overall vehicle sales volume declined for most companies in the fourth-quarter 2021, increasing EV deliveries remained a bright spot. The EV momentum is only expected to blossom, going forward.
High Commodity Costs & Capex Needs: Automakers are battling rising commodity costs, which are set to dent margins. Raw material inflation is not likely to ease anytime soon and most automakers have already warned that this would remain a major headwind for quite some time. Manufacturing inefficiencies, a tight labor market and logistical challenges are also playing spoilsports. Additionally, while massive capital expenditure in green vehicles and self-driving cars will prove beneficial in the long term, it is likely to strain near-term cash flows.
Zacks Industry Rank Indicates Muted Prospects
The Zacks Automotive – Domestic industry is a 24-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #163, which places it in the bottom 36% 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 lackluster 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2022 have declined 22.5% since November 2021-end.
Despite the industry’s dim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500, Almost In Line With the Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite over the past year. The industry has declined 10.9% versus the S&P 500’s increase of 17.9%. Meanwhile, the sector has slumped 11% over the said time frame.
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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 24.96X compared with the S&P 500’s 14.79X and the sector’s 13.27X. Over the past five years, the industry has traded as high as 45.31X, as low as 8.75X and at a median of 12.89X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks Likely to Brave Industry Challenges
Tesla: Over the years, EV king Tesla has evolved into a dynamic technology innovator. With Model 3 being its flagship vehicle, Tesla has established itself as a leader in the EV segment. Tesla is riding on the rising demand for Models 3 and Y. Tesla anticipates achieving 50% average annual growth in vehicle deliveries over a multi-year horizon. With China being the biggest EV market, the Shanghai factory is further fueling TSLA’s revenue prospects. The progress of gigafactories 4 (in Berlin) and 5 (in Austin) is also on track, nearing assembly of its first production cars.
Tesla has a long-term expected EPS growth rate of 38.4%. The Zacks Consensus Estimate for TSLA’s 2022 earnings and sales implies year-over-year growth of 35.2% and 44.4%, respectively. It surpassed earnings estimates in three of the trailing four quarters and missed on another occasion, with an average surprise of 25.4%. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TSLA
Ford: The U.S. auto giant’s prospects are getting bolstered by a strong vehicle mix, supported by F-series trucks and SUV models. Ford’s aggressive electrification push, with the target of 40% global vehicle volume to become all-electric by the end of the decade, augurs well. While Mustang Mach-E has already become a hit among consumers, upcoming launches like F-150 Electric, Maverick hybrid pickup and E-Transit are set to further drive the firm’s top line. Recently, Ford cheered investors with the restoration of dividends, after suspending the payout for more than a year and a half amid the COVID-19 crisis.
Ford has a long-term expected EPS growth rate of 25.2%. The Zacks Consensus Estimate for F’s 2022 earnings and sales implies year-over-year growth of 8.1% and 15.4%, respectively. It surpassed earnings estimates in the last four quarters, with an average of 335.6%. The stock presently flaunts a Zacks Rank #1.
Price and Consensus: F
General Motors: This legacy automaker’s hot-selling brands in America like Chevrolet Silverado, Equinox and GMC Sierra are driving its top line. General Motors’ big push toward EVs is commendable. The automaker plans to roll out 30 fresh EV models by 2025-end. Key launches, including the GMC Hummer EV and Cadillac Lyriq crossover EV, are expected to bolster prospects. GM’s superior liquidity profile augurs well. The firm had total liquidity of $29.5 billion as of Sep 30, 2021, including $4.9 billion of cash and cash equivalents.
General Motors has a long-term expected EPS growth rate of 9.9%. The Zacks Consensus Estimate for GM’s 2022 earnings and sales implies year-over-year growth of 3% and 14.6%, respectively. It surpassed earnings estimates in the last four quarters, with an average of 46.5%. The stock currently carries a Zacks Rank #2 (Buy).
Price and Consensus: GM
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3 Domestic Auto Stocks in High Gear Despite Supply Chain Snarls
The Zacks Domestic Auto industry is currently battling global chip famine, which is not expected to abate at least till first-half 2022. Vehicle sales of various auto majors are being weighed down by manufacturing inefficiencies and tight inventory. Nonetheless, the rising prices of vehicles are likely to have offset low volumes to a large extent. Meanwhile, companies are bearing the brunt of soaring commodity costs, which are set to dent margins. But there is one bright spot, i.e., the soaring deliveries of electric vehicles (EVs), which are becoming mainstream with each passing day and are likely to buoy the prospects of auto giants like Tesla (TSLA - Free Report) , Ford (F - Free Report) , and General Motors (GM - Free Report) .
About the Industry
The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and 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. Widespread usage of technology and rapid digitization are resulting in the fundamental restructuring of the automotive market. Several companies from the industry have engine and transmission plants and conduct research and development and testing of electric and autonomous vehicles.
Factors Influencing the Industry's Fate
Supply-Demand Mismatch: Although buyers’ appetite for personal vehicles is quite strong, the auto industry is struggling to meet the mounting demand owing to the global chip crunch. Various auto biggies are grappling with semiconductor supply deficit, which is hindering their business operations and forcing them to idle production lines. There are no signs of the easing of chip issues, at least till first-half 2022. Some experts expect the shortage to linger in 2023 as well.
Vehicle Prices Soaring: As inventory challenges are mounting amid supply-demand imbalance, the average prices of vehicles (both new and used) are shooting up. With prices going through the roof, some customers are willing to pay a premium for their preferred vehicle. That’s a positive for automakers, as the high sales price of vehicles is somewhat offsetting the decline in volumes. But then, there is another set of consumers that are not willing to pay a heavy premium and are waiting on the sidelines in the light of limited choice and high prices.
Love for Electric Cars: Climate change concerns, technological advancement and stringent fuel-emission standards are increasing green vehicles’ adoption by both automakers as well as customers. Legacy automakers are going the extra mile to gain a strong foothold in this red-hot e-mobility space. Demand for electric cars is off the charts. While overall vehicle sales volume declined for most companies in the fourth-quarter 2021, increasing EV deliveries remained a bright spot. The EV momentum is only expected to blossom, going forward.
High Commodity Costs & Capex Needs: Automakers are battling rising commodity costs, which are set to dent margins. Raw material inflation is not likely to ease anytime soon and most automakers have already warned that this would remain a major headwind for quite some time. Manufacturing inefficiencies, a tight labor market and logistical challenges are also playing spoilsports. Additionally, while massive capital expenditure in green vehicles and self-driving cars will prove beneficial in the long term, it is likely to strain near-term cash flows.
Zacks Industry Rank Indicates Muted Prospects
The Zacks Automotive – Domestic industry is a 24-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #163, which places it in the bottom 36% 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 lackluster 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for 2022 have declined 22.5% since November 2021-end.
Despite the industry’s dim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500, Almost In Line With the Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite over the past year. The industry has declined 10.9% versus the S&P 500’s increase of 17.9%. Meanwhile, the sector has slumped 11% over the said time frame.
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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 24.96X compared with the S&P 500’s 14.79X and the sector’s 13.27X. Over the past five years, the industry has traded as high as 45.31X, as low as 8.75X and at a median of 12.89X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks Likely to Brave Industry Challenges
Tesla: Over the years, EV king Tesla has evolved into a dynamic technology innovator. With Model 3 being its flagship vehicle, Tesla has established itself as a leader in the EV segment. Tesla is riding on the rising demand for Models 3 and Y. Tesla anticipates achieving 50% average annual growth in vehicle deliveries over a multi-year horizon. With China being the biggest EV market, the Shanghai factory is further fueling TSLA’s revenue prospects. The progress of gigafactories 4 (in Berlin) and 5 (in Austin) is also on track, nearing assembly of its first production cars.
Tesla has a long-term expected EPS growth rate of 38.4%. The Zacks Consensus Estimate for TSLA’s 2022 earnings and sales implies year-over-year growth of 35.2% and 44.4%, respectively. It surpassed earnings estimates in three of the trailing four quarters and missed on another occasion, with an average surprise of 25.4%. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TSLA
Ford: The U.S. auto giant’s prospects are getting bolstered by a strong vehicle mix, supported by F-series trucks and SUV models. Ford’s aggressive electrification push, with the target of 40% global vehicle volume to become all-electric by the end of the decade, augurs well. While Mustang Mach-E has already become a hit among consumers, upcoming launches like F-150 Electric, Maverick hybrid pickup and E-Transit are set to further drive the firm’s top line. Recently, Ford cheered investors with the restoration of dividends, after suspending the payout for more than a year and a half amid the COVID-19 crisis.
Ford has a long-term expected EPS growth rate of 25.2%. The Zacks Consensus Estimate for F’s 2022 earnings and sales implies year-over-year growth of 8.1% and 15.4%, respectively. It surpassed earnings estimates in the last four quarters, with an average of 335.6%. The stock presently flaunts a Zacks Rank #1.
Price and Consensus: F
General Motors: This legacy automaker’s hot-selling brands in America like Chevrolet Silverado, Equinox and GMC Sierra are driving its top line. General Motors’ big push toward EVs is commendable. The automaker plans to roll out 30 fresh EV models by 2025-end. Key launches, including the GMC Hummer EV and Cadillac Lyriq crossover EV, are expected to bolster prospects. GM’s superior liquidity profile augurs well. The firm had total liquidity of $29.5 billion as of Sep 30, 2021, including $4.9 billion of cash and cash equivalents.
General Motors has a long-term expected EPS growth rate of 9.9%. The Zacks Consensus Estimate for GM’s 2022 earnings and sales implies year-over-year growth of 3% and 14.6%, respectively. It surpassed earnings estimates in the last four quarters, with an average of 46.5%. The stock currently carries a Zacks Rank #2 (Buy).
Price and Consensus: GM