We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
2 Buy-Ranked Foreign Auto Stocks to Escape Industry Woes
Read MoreHide Full Article
Prospects of the Zacks Automotive – Foreign industry appear muted as companies are battling the global shortage of semiconductor supply, which has gotten all the more exacerbated by the rising coronavirus cases in China and the armed conflict between Russia and Ukraine. Manufacturing inefficiencies, high commodity costs, and escalating capex and research & development (R&D) costs for the development of electric vehicles (EVs) may strain the near-term margins of automakers. Two stocks that seem to be standing tall amid multiple headwinds surrounding the industry are Mercedes-Benz Group AG and Suzuki Motor Corporation (SZKMY - Free Report) .
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.
5 Key Themes Influencing the Industry's Fate
Chip Crisis Compounds Amid Russia-Ukraine War: Just when industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the geopolitical conflict between Russia and Ukraine triggered a second round of global microchip shortage. Both Russia and Ukraine are key suppliers of major gases and raw materials required for global semiconductor production. In addition to the shortage of microchips, possibilities of escalation of supply shortage of other key components are also high, which is likely to limit production volumes.
Rising COVID-19 Cases in China Spell Trouble: Due to a recent surge in COVID-19 cases, China — the world’s largest auto market — has reinstated restrictions as it is facing the biggest outbreak since early 2020. China’s zero-COVID policy is forcing automakers to halt operations in the country’s largest metropolis, Shanghai, where key vehicle manufacturing hubs are located. Increasing lockdowns in Shanghai, Shenzhen, Changchun and other cities are likely to have a severe impact on the auto industry. Temporary suspension of operations at auto factories will translate to a downward shift in production. Additionally, it will add to the supply chain snafus.
Europe and Japan’s Lackluster Sales Picture: In a telling sign that chip shortage is wreaking havoc on the auto industry, new passenger registrations in the European Union tailed off 6% year over year in January 2022, marking a new historic low for the month in terms of sales volume. Sales contracted another 6.7% year over year in February. New vehicle sales in Japan were down 3.3% year over year in 2021, failing to reach the 5 million units mark for the second straight year. For the first three months of 2022, sales volume dipped 14.2%, 18% and 16.3%, respectively. The road ahead is likely to be rough as supply-chain disruptions are not expected to abate anytime soon.
Aggressive EV Spending to Strain Near-Term Financials: Various cities and nations are pushing toward green energy amid heightening climate concerns. The European Commission and California plan to phase out new petrol and diesel cars by 2035. China and Canada intend to ban new fossil fuel cars by 2035. Japan will scrap the sale of gasoline-powered cars by mid-2030s. While the ramp up of EV targets will offer opportunities to automakers, it will also escalate capex and R&D expenses as they transition from ICE models. As it is, the companies are battling with high commodity, labor and logistical costs amid supply chain disruptions.
Rising Vehicle Prices Providing a Boost: As inventory challenges are mounting amid the supply-demand imbalance, the average prices of vehicles 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.
Zacks Industry Rank Signals Gloomy 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 #211, which places it in the bottom 16% 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 tepid 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 January, average earnings estimates for 2022 have declined 7%.
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 declined 6.9%, wider than the sector’s fall of 1.1%. Meanwhile, the S&P 500 Index has moved up 12% over the same 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 7.25X compared with the S&P 500’s 14.98X and the sector’s 19.17X.
Over the past five years, the industry has traded as high as 10.6X, as low as 5.32X and at a median of 6.73X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks Braving Industry Headwinds
Mercedes-Benz: Germany-based Mercedes-Benz develops and sells a wide range of premium and luxury vehicles. It also offers financing and leasing packages for retail customers and dealers. Additionally, it provides automotive insurance brokerage and banking services and digital services for charging and payment and mobility services. DDAIF’s collaborations with other key automakers for the development of high-performance public charging stations in Europe are praiseworthy. Mercedes-Benz is geared up for a tight race in the EV domain and plans to go all-electric by 2030-end. For the transition into a software-driven and carbon-free future, the company intends to invest more than 60 billion euros over 2022-2026.
DDAIF has a lineup of several new EV models, with the latest being Mercedes-AMG EQE, an electric luxury sedan, slated to go on sale in 2023. Over the past year, Mercedes has announced an onrush of new battery-powered vehicles, debuting with the EQS, its six-figure flagship, followed by the AMG EQS, a sportier version of the car developed by its performance division. The auto bigwig has placed its bets on the EQE model to bolster sales of EV units, as it looks to invest more in electric-only production platforms.
Mercedes-Benz has a long-term expected EPS growth rate of 28.8%. The Zacks Consensus for 2022 earnings has moved up 33 cents over the past 60 days and implies year-over-year growth of 213.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DDAIF
Suzuki: Japan-based Suzuki manufactures and markets motorcycles, automobiles, and marine and power products. It provides terrain vehicles, mini-vehicles, sub-compact vehicles, standard-sized vehicles, outboard motors, engines for snowmobiles, electro senior vehicles and houses, boats, motorized wheelchairs, electro-scooters, and industrial equipment.
Last month, Suzuki joined forces with SkyDrive for the commercialization of flying cars. The collaboration will provide Suzuki with opportunities to potentially include flying cars as a fourth mobility business. Recently, Suzuki also laid out plans to invest about 150 billion yen to manufacture EVs and batteries in India. For fiscal 2021 (ended March 2022), the company expects net sales of 3.4 trillion yen, indicating 7% year-over-year growth. Profit is envisioned at $150 billion yen, implying a 2.4% uptick on a year-over-year basis.
The Zacks Consensus Estimate for SZKMY’s fiscal 2022 earnings and sales implies year-over-year growth of 32.4% and 11%, respectively. The earnings estimate has moved north by 9 cents over the past 60 days. The stock currently carries a Zacks Rank #2 and has a VGM Score of A.
Price & Consensus: SZKMY
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
2 Buy-Ranked Foreign Auto Stocks to Escape Industry Woes
Prospects of the Zacks Automotive – Foreign industry appear muted as companies are battling the global shortage of semiconductor supply, which has gotten all the more exacerbated by the rising coronavirus cases in China and the armed conflict between Russia and Ukraine. Manufacturing inefficiencies, high commodity costs, and escalating capex and research & development (R&D) costs for the development of electric vehicles (EVs) may strain the near-term margins of automakers. Two stocks that seem to be standing tall amid multiple headwinds surrounding the industry are Mercedes-Benz Group AG and Suzuki Motor Corporation (SZKMY - Free Report) .
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.
5 Key Themes Influencing the Industry's Fate
Chip Crisis Compounds Amid Russia-Ukraine War: Just when industry watchdogs and auto giants were predicting the chip deficit to gradually start easing out from mid-2022, the geopolitical conflict between Russia and Ukraine triggered a second round of global microchip shortage. Both Russia and Ukraine are key suppliers of major gases and raw materials required for global semiconductor production. In addition to the shortage of microchips, possibilities of escalation of supply shortage of other key components are also high, which is likely to limit production volumes.
Rising COVID-19 Cases in China Spell Trouble: Due to a recent surge in COVID-19 cases, China — the world’s largest auto market — has reinstated restrictions as it is facing the biggest outbreak since early 2020. China’s zero-COVID policy is forcing automakers to halt operations in the country’s largest metropolis, Shanghai, where key vehicle manufacturing hubs are located. Increasing lockdowns in Shanghai, Shenzhen, Changchun and other cities are likely to have a severe impact on the auto industry. Temporary suspension of operations at auto factories will translate to a downward shift in production. Additionally, it will add to the supply chain snafus.
Europe and Japan’s Lackluster Sales Picture: In a telling sign that chip shortage is wreaking havoc on the auto industry, new passenger registrations in the European Union tailed off 6% year over year in January 2022, marking a new historic low for the month in terms of sales volume. Sales contracted another 6.7% year over year in February. New vehicle sales in Japan were down 3.3% year over year in 2021, failing to reach the 5 million units mark for the second straight year. For the first three months of 2022, sales volume dipped 14.2%, 18% and 16.3%, respectively. The road ahead is likely to be rough as supply-chain disruptions are not expected to abate anytime soon.
Aggressive EV Spending to Strain Near-Term Financials: Various cities and nations are pushing toward green energy amid heightening climate concerns. The European Commission and California plan to phase out new petrol and diesel cars by 2035. China and Canada intend to ban new fossil fuel cars by 2035. Japan will scrap the sale of gasoline-powered cars by mid-2030s. While the ramp up of EV targets will offer opportunities to automakers, it will also escalate capex and R&D expenses as they transition from ICE models. As it is, the companies are battling with high commodity, labor and logistical costs amid supply chain disruptions.
Rising Vehicle Prices Providing a Boost: As inventory challenges are mounting amid the supply-demand imbalance, the average prices of vehicles 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.
Zacks Industry Rank Signals Gloomy 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 #211, which places it in the bottom 16% 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 tepid 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 January, average earnings estimates for 2022 have declined 7%.
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 declined 6.9%, wider than the sector’s fall of 1.1%. Meanwhile, the S&P 500 Index has moved up 12% over the same 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 7.25X compared with the S&P 500’s 14.98X and the sector’s 19.17X.
Over the past five years, the industry has traded as high as 10.6X, as low as 5.32X and at a median of 6.73X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks Braving Industry Headwinds
Mercedes-Benz: Germany-based Mercedes-Benz develops and sells a wide range of premium and luxury vehicles. It also offers financing and leasing packages for retail customers and dealers. Additionally, it provides automotive insurance brokerage and banking services and digital services for charging and payment and mobility services. DDAIF’s collaborations with other key automakers for the development of high-performance public charging stations in Europe are praiseworthy. Mercedes-Benz is geared up for a tight race in the EV domain and plans to go all-electric by 2030-end. For the transition into a software-driven and carbon-free future, the company intends to invest more than 60 billion euros over 2022-2026.
DDAIF has a lineup of several new EV models, with the latest being Mercedes-AMG EQE, an electric luxury sedan, slated to go on sale in 2023. Over the past year, Mercedes has announced an onrush of new battery-powered vehicles, debuting with the EQS, its six-figure flagship, followed by the AMG EQS, a sportier version of the car developed by its performance division. The auto bigwig has placed its bets on the EQE model to bolster sales of EV units, as it looks to invest more in electric-only production platforms.
Mercedes-Benz has a long-term expected EPS growth rate of 28.8%. The Zacks Consensus for 2022 earnings has moved up 33 cents over the past 60 days and implies year-over-year growth of 213.8%. The stock currently carries a Zacks Rank #2 (Buy) and has a VGM Score of B. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: DDAIF
Suzuki: Japan-based Suzuki manufactures and markets motorcycles, automobiles, and marine and power products. It provides terrain vehicles, mini-vehicles, sub-compact vehicles, standard-sized vehicles, outboard motors, engines for snowmobiles, electro senior vehicles and houses, boats, motorized wheelchairs, electro-scooters, and industrial equipment.
Last month, Suzuki joined forces with SkyDrive for the commercialization of flying cars. The collaboration will provide Suzuki with opportunities to potentially include flying cars as a fourth mobility business. Recently, Suzuki also laid out plans to invest about 150 billion yen to manufacture EVs and batteries in India. For fiscal 2021 (ended March 2022), the company expects net sales of 3.4 trillion yen, indicating 7% year-over-year growth. Profit is envisioned at $150 billion yen, implying a 2.4% uptick on a year-over-year basis.
The Zacks Consensus Estimate for SZKMY’s fiscal 2022 earnings and sales implies year-over-year growth of 32.4% and 11%, respectively. The earnings estimate has moved north by 9 cents over the past 60 days. The stock currently carries a Zacks Rank #2 and has a VGM Score of A.
Price & Consensus: SZKMY