Domestic Auto industry is reeling under global microchip shortage and supply chain disruptions exacerbated by the Russia-Ukraine war. Amid the tight inventory levels, sales volumes are getting affected. Additionally, chances are slim that rising vehicle prices would continue to offset volume woes and serve as a catalyst for the automakers as worries of an economic slowdown loom large. Manufacturing inefficiencies and escalating commodity costs are further clipping margins. While robust deliveries of electric vehicles (EV) are acting as a booster, the overall prospects of the industry don’t appear bright, at least for the near term. Nonetheless, we recommend keeping a close eye on two auto biggies namely General Motors ( GM Quick Quote GM - Free Report) and Ford ( F Quick Quote F - Free Report) , which are currently trading at discounted levels and are better positioned to brave the multiple industry woes. Industry Overview
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. The 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.
4 Key Themes Shaping the Industry
: Automakers are battling a severe chip crisis aggravated by the Russia-Ukraine war and lockdown restrictions in China. Many auto biggies are temporarily suspending operations and slashing their production targets amid supply-chain snafus and logistical challenges. U.S. new vehicle sales declined more than 12% in the first quarter of 2022. The decline worsened in April. Per the Automotive News Research & Data Center, cumulative U.S. vehicles sales (for the automakers who reported sales figures) fell more than 21% on a year-over-year basis.There are no signs of the easing of chip issues in the near term, which is going to limit automakers’ production and sales volumes. Chip Crisis & Supply Chain Snarls Hurting Output :Prices of raw materials like steel, aluminum and others are soaring and adversely impacting the gross margins. Commodity inflation is not likely to abate anytime soon and most automakers have already warned that this will remain a major headwind for quite some time.Manufacturing inefficiencies and a difficult labor market are expected to keep playing spoilsports. Additionally, massive R&D expenses for the development of high-tech cars would also likely strain near-term cash flows. High Commodity & Operational Costs Ailing Margins : As inventory challenges are mounting amid supply-demand imbalance, the average price of vehicles (both new and used) is shooting up. This has aided automakers as the high sales price of vehicles is somewhat offsetting the decline in volumes. However, amid concerns of economic slowdown, high inflation and rising interest rates, buyers are now expected to delay such discretionary expenses, especially when the prices of cars are going through the roof. So, there are chances that automakers and dealers who are already struggling with production and tight inventory might now be threatened by high prices, which may keep buyers away from showrooms. Rising Vehicle Prices Less Likely to Offer Respite
: Amid all the gloom and doom, buyers’ inclination toward green cars is serving as a key catalyst. 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 U.S. vehicle sales volume declined for most companies in first-quarter 2022, increasing EV deliveries (up around 60% year over year) remained a bright spot. The EV momentum is only expected to blossom, going forward. Soaring Popularity of EVs Acting as a Tailwind Zacks Industry Rank Indicates Dim 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 #183, which places it in the bottom 28% of more than 250 Zacks industries.
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 17.9% over the past six months.
Despite the industry’s glum near-term prospects, we will present two 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, Outperforms the Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite over the past year. The industry has declined 13.7% compared with the S&P 500’s loss of 1.9%. Meanwhile, the sector has slumped 19.6% 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 44.42X compared with the S&P 500’s 13.19X and the sector’s 17.23X. Over the past five years, the industry has traded as high as 68.22X, as low as 8.75X and at a median of 13.69X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Legacy Automakers to Add to Your Watchlist
General Motors: General Motors’ 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, Cadillac Lyriq crossover EV, Equinox EV, Silverdo EV and Blazer EV among others are expected to buoy top-line growth. General Motors expects wholesale volumes to increase 25-30% year over year in 2022, with the bulk of growth expected in the second half of the year. For 2022, the company expects full-year net income to be in a range of $9.6-$11.2 billion, higher than the previous range of $9.4-$10.8 billion. General Motors has enough cash on the balance sheet to weather short-term headwinds and navigate economic cycles. The firm had total automotive liquidity of $29 billion as of Mar 31, 2022 including $17.7 billion of cash and cash equivalents.
The Zacks Consensus Estimate for GM’s 2022 sales implies year-over-year growth of 20.9%. The consensus mark for 2022 earnings have moved north by 13 cents over the past 30 days. General Motors currently carries a Zacks Rank #3 (Hold) and has a VGM Score of B.
Price & Consensus: GM Ford: Ford’s vehicle lineup supported by F-series trucks, Maverick pickup and SUV models, including Escape, Explorer, Expedition, EcoSport, and Edge, is impressive. With Mustang Mach-E, E-Transit and F-150 Lightning, the robust BEV lineup would further aid deliveries.The Ford+ plan, with a deep focus on increasing profitability, exploring the e-mobility future and enhancing customer experience, sparks optimism. Ford’s ambitious rejig plan to split its EV business into a separate unit within the company will unlock growth opportunities. The company’s improving financials provides a solid foundation for investment in Ford+ priorities.Ford ended the first quarter of 2022 with more than $29 billion in cash and $45 billion in liquidity. It reduced its automotive debt from $17,200 million (as of Dec 31, 2021) to $17,158 million as of Mar 31, 2022.
The Zacks Consensus Estimate for Ford’s 2022 earnings and sales implies year-over-year growth of 20.7% and 14%, respectively. The consensus mark for 2022 earnings has moved north by 1 cent over the past 30 days. Ford currently carries a Zacks Rank #3 and has a VGM Score of B.
Price & Consensus: F