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Domestic Autos Industry Outlook: Smooth Ride Ahead

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The Zacks Domestic Auto industry consists of companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. The vehicles include passenger cars, crossover vehicles, trucks, sport utility vehicles (SUVs), vans and motorcycles.

The industry, which provides employment to a large number of people, is also at the forefront of innovation. Several companies have engine and transmission plants and conduct research and development (R&D) and testing.

The industry includes prominent names such as General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) , alongside electric vehicles (“EV”) pioneer Tesla, Inc. (TSLA - Free Report) and motor cycle maker Harley-Davidson, Inc. (HOG - Free Report) .

Let’s take a look at the industry’s three major themes:

  • The auto space is undergoing rapid transformation. There has been a discernible rise in sales of crossovers, SUVs and pick-up trucks while sales of sedans and hatchbacks are declining. U.S. automakers have benefited from a shift by consumers from traditional passenger cars to larger, more comfortable SUVs, which tend to be more profitable for producers. Automakers are altering production strategies accordingly.
     
  • Of late, China’s tit-for-tat tariffs have been taking a toll on auto stocks. So far, both United States and China have imposed tariffs on goods worth of $50 billion each.However, now, with Democrats in control of the House, Trump may not be able to continue his hardline trade policy with China. An end to trade conflict may come as a relief to domestic auto producers.
     
  • The problem of safety still haunts automakers. In recent times, there have been a large number of recalls. This has not only marred automakers’ image but also put lives under threat.


Zacks Industry Rank Indicates Solid Prospects

The Zacks Domestic Auto industry is a seven-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #8, which places it in the top 3% 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 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. Over the past year, the industry’s earnings estimate for the current year has gone up by 3.2%.

Before we present a few domestic auto 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 Outperforms Sector but Lags S&P 500

The Domestic Auto Industry has outperformed its own sector over the past year, but underperformed the Zacks S&P 500 composite over the same time frame.

Over this period, the industry has declined 9.7% compared with the sector’s decline of 18.5%. The Zacks S&P 500 composite has gained 7.5% in the same time frame.

One-Year Price Performance



Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing auto stocks, the industry is currently trading at 8.54X compared with the S&P 500’s 9.91X. However, it is above the sector’s trailing-12-month EV/EBITDA of 7.58X.

Over the past five years, the industry has traded as high as 10.33X, as low as 7.80X and at a median of 8.43X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio


 
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

The near-term prospects of the domestic auto industry appear to be encouraging on factors such as strong economy, bright employment prospects and declining trade-related uncertainties. The new-found demand for SUVs and crossovers in place of passenger cars and sedans is also driving growth for domestic auto companies.

Notwithstanding the near-term tailwinds, automakers’ journey on potential mobility track continues. However, the perennial problem of recalls will remain an overhang.

A couple of stocks in the Zacks Domestic Auto space currently sporting a Zacks Rank #1 (Strong Buy) are Fox Factory Holding Corp. (FOXF - Free Report) and Tesla. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fox Factory Holding: The Zacks Consensus Estimate for current-year earnings of this California-based company has moved 5.3% north over the past 30 days.

Price and Consensus: FOXF


 
Tesla: The Zacks Consensus Estimate for current-year earnings of this Palo Alto, CA-based company has narrowed from a loss of $6.57 to a loss of $2.10 over the past 30 days.

Price and Consensus: TSLA

We also present two stocks with a Zacks Rank #2 (Buy) that are well positioned to grow.

General Motors: The Zacks Consensus Estimate for current-year earnings of this Detroit, MI-based company has moved 3.5% north over the past 30 days.

Price and Consensus: GM


PACCAR Inc. (PCAR - Free Report) : The Zacks Consensus Estimate for current-year earnings of this Bellevue, WA-based company has moved 2% north over the past 30 days.

Price and Consensus: PCAR


 
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