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3 Stocks Navigating the Rough Waters of Auto Equipment Industry
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The Zacks Automotive - Original Equipment industry is in the doldrums as the microchip crunch is resulting in a decline in sales for automotive equipment providers. Escalating commodity and operating costs are acting as major speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses. With the industry already in disarray amid the chip crisis, the performance of the companies will largely depend on how well they can manage the rising commodity and R&D expenses. In the prevailing scenario, a few industry participants like BorgWarner Inc. (BWA - Free Report) , ChargePoint Holdings (CHPT - Free Report) and EVgo (EVGO - Free Report) seem relatively strong to fend off the headwinds.
About the Industry
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors Deciding the Industry's Fate
Shortage of Microchips: Auto equipment manufacturers are dependent on microchips and a shortfall of the same is hindering their business operations. Industry participants are of the view that the chip crunch will persist through 2022 and next year as well, thereby impacting the production of light and commercial vehicles. The chip crisis and supply chain disruptions have been compounded by the Russia-Ukraine war, which is adversely impacting the sales of the industry participants, inducing lost revenues.
Commodity Cost Inflation: The industry players are also likely to suffer from escalating prices of raw materials and a tough labor market. Most of the industry players have acknowledged that the increasing cost of raw materials is set to impact their margins. Rising freight costs, logistical challenges and manufacturing inefficiencies are likely to further weigh on the gross margins of the auto equipment firms.
High Capex Requirements: Although evolving technologies and rising demand for electrified and autonomous vehicles are providing new opportunities to the industry, they are anticipated to strain the near-term financials of companies. With the technology shift in full swing, original equipment manufacturers have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. The new features, upgrades and component designs call for abundant capital, which is likely to clip near-term cash flows.
Zacks Industry Rank Indicates Tepid Outlook
The Zacks Automotive – Original Equipment industry is a 61-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #149, which places it in the bottom 41% of around 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 March, the industry’s earnings estimates for 2022 have declined 39%.
Despite the murky scenario, we will present a few stocks that you may invest in, given their growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.
Industry Lags Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed both the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 39.1%, underperforming the sector and S&P 500’s decline of 16.7% and 14%, 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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 19.21X compared with the S&P 500’s 12.2X and the sector’s 15.21X.
Over the past five years, the industry has traded as high as 21.48X, as low as 3.70X and at a median of 7.44X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks to Buy
BorgWarner: Michigan-based is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles.The buyout of Delphi Technologies has strengthened BorgWarner’s electric propulsion leadership, with expanded capabilities and scale. The acquisition of AKASOL, completed in February 2022, has expanded BorgWarner’s commercial vehicle electrification capabilities and is set to aid top-line growth. For full-year 2022, BorgWarner anticipates net sales within $15.5-$16 billion, indicating an increase from $14.8 billion generated in 2021.BorgWarner’s Charging Forward project to accelerate its electrification strategy bodes well.
The Zacks Consensus Estimate for BWA’s 2022 and 2023 sales implies year-over-year growth of 6.3% and 9%, respectively. The consensus mark for 2022 and 2023 earnings signals a year-over-year improvement of 2.9% and 19%, respectively. BorgWarner — currently having a Zacks Rank #2 (Buy) and a Value Score of A — topped earnings estimates in the trailing four quarters.
ChargePoint: This charging company is the market leader in North America in commercial Level 2 AC chargers. It is also actively focusing on expansion into European markets. ChargePoint currently has more than 200,000 activated charging ports in North America and Europe. The acquisitions of has·to·be and Viriciti have accelerated CHPT’s position in the EV charging ecosystem. Strategic collaborations with Sonepar, Gatik, Wheels Donlen and others augur well. To date, ChargePoint has delivered more than 123 million charging sessions. For fiscal 2023, ChargePoint envisions revenues in the band of $450- $500 million, implying 96% year-over-year growth at the midpoint of the guidance.
The Zacks Consensus Estimate for CHPT’s fiscal 2023 and 2024 sales implies year-over-year growth of 97% and 54%, respectively. The consensus mark for fiscal 2023 and 2024 bottom line signals a year-over-year improvement of 55% and 23%, respectively. ChargePoint currently carries a Zacks Rank #2.
Price and Consensus: CHPT
EVgo: EVgo is the largest public fast-charging network for EVs in the United States. It is also the first charging firm to be powered by 100% renewable energy. As of Jun 30, 2022, EVGO operated more than 850 charging locations. Customer accounts increased 60% year over year to roughly 444,000 at the end of the second quarter of 2022. The EVgo eXtend project, in partnership with General Motors and Pilot Company, is anticipated to lead to roughly 2,000 new stalls at 500 locations in the United States over the next few years. The company has also collaborated with Delta Electronics for 1,000 chargers in a bid to advance nationwide access to EV charging.
The Zacks Consensus Estimate for EVgo’s 2022 and 2023 sales implies year-over-year growth of 118% and 195%, respectively. The consensus mark for 2022 and 2023 bottom line signals a year-over-year improvement of 35% and 18%, respectively. EVgo currently carries a Zacks Rank #2.
Price and Consensus: EVGO
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3 Stocks Navigating the Rough Waters of Auto Equipment Industry
The Zacks Automotive - Original Equipment industry is in the doldrums as the microchip crunch is resulting in a decline in sales for automotive equipment providers. Escalating commodity and operating costs are acting as major speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses. With the industry already in disarray amid the chip crisis, the performance of the companies will largely depend on how well they can manage the rising commodity and R&D expenses. In the prevailing scenario, a few industry participants like BorgWarner Inc. (BWA - Free Report) , ChargePoint Holdings (CHPT - Free Report) and EVgo (EVGO - Free Report) seem relatively strong to fend off the headwinds.
About the Industry
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering, and suspension as well as brakes. Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. Importantly, the rapidly globalizing world is opening up newer avenues for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development. From a future competitive standpoint, the industry players need to focus on technologies that offer the best value in a short span of time to the market.
Factors Deciding the Industry's Fate
Shortage of Microchips: Auto equipment manufacturers are dependent on microchips and a shortfall of the same is hindering their business operations. Industry participants are of the view that the chip crunch will persist through 2022 and next year as well, thereby impacting the production of light and commercial vehicles. The chip crisis and supply chain disruptions have been compounded by the Russia-Ukraine war, which is adversely impacting the sales of the industry participants, inducing lost revenues.
Commodity Cost Inflation: The industry players are also likely to suffer from escalating prices of raw materials and a tough labor market. Most of the industry players have acknowledged that the increasing cost of raw materials is set to impact their margins. Rising freight costs, logistical challenges and manufacturing inefficiencies are likely to further weigh on the gross margins of the auto equipment firms.
High Capex Requirements: Although evolving technologies and rising demand for electrified and autonomous vehicles are providing new opportunities to the industry, they are anticipated to strain the near-term financials of companies. With the technology shift in full swing, original equipment manufacturers have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. The new features, upgrades and component designs call for abundant capital, which is likely to clip near-term cash flows.
Zacks Industry Rank Indicates Tepid Outlook
The Zacks Automotive – Original Equipment industry is a 61-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #149, which places it in the bottom 41% of around 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 March, the industry’s earnings estimates for 2022 have declined 39%.
Despite the murky scenario, we will present a few stocks that you may invest in, given their growth endeavors. But before that, it’s worth taking a look at the industry’s performance and current valuation.
Industry Lags Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has underperformed both the broader Auto sector and the Zacks S&P 500 composite. The industry has lost 39.1%, underperforming the sector and S&P 500’s decline of 16.7% and 14%, 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 the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 19.21X compared with the S&P 500’s 12.2X and the sector’s 15.21X.
Over the past five years, the industry has traded as high as 21.48X, as low as 3.70X and at a median of 7.44X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
3 Stocks to Buy
BorgWarner: Michigan-based is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles.The buyout of Delphi Technologies has strengthened BorgWarner’s electric propulsion leadership, with expanded capabilities and scale. The acquisition of AKASOL, completed in February 2022, has expanded BorgWarner’s commercial vehicle electrification capabilities and is set to aid top-line growth. For full-year 2022, BorgWarner anticipates net sales within $15.5-$16 billion, indicating an increase from $14.8 billion generated in 2021.BorgWarner’s Charging Forward project to accelerate its electrification strategy bodes well.
The Zacks Consensus Estimate for BWA’s 2022 and 2023 sales implies year-over-year growth of 6.3% and 9%, respectively. The consensus mark for 2022 and 2023 earnings signals a year-over-year improvement of 2.9% and 19%, respectively. BorgWarner — currently having a Zacks Rank #2 (Buy) and a Value Score of A — topped earnings estimates in the trailing four quarters.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BWA
ChargePoint: This charging company is the market leader in North America in commercial Level 2 AC chargers. It is also actively focusing on expansion into European markets. ChargePoint currently has more than 200,000 activated charging ports in North America and Europe. The acquisitions of has·to·be and Viriciti have accelerated CHPT’s position in the EV charging ecosystem. Strategic collaborations with Sonepar, Gatik, Wheels Donlen and others augur well. To date, ChargePoint has delivered more than 123 million charging sessions. For fiscal 2023, ChargePoint envisions revenues in the band of $450- $500 million, implying 96% year-over-year growth at the midpoint of the guidance.
The Zacks Consensus Estimate for CHPT’s fiscal 2023 and 2024 sales implies year-over-year growth of 97% and 54%, respectively. The consensus mark for fiscal 2023 and 2024 bottom line signals a year-over-year improvement of 55% and 23%, respectively. ChargePoint currently carries a Zacks Rank #2.
Price and Consensus: CHPT
EVgo: EVgo is the largest public fast-charging network for EVs in the United States. It is also the first charging firm to be powered by 100% renewable energy. As of Jun 30, 2022, EVGO operated more than 850 charging locations. Customer accounts increased 60% year over year to roughly 444,000 at the end of the second quarter of 2022. The EVgo eXtend project, in partnership with General Motors and Pilot Company, is anticipated to lead to roughly 2,000 new stalls at 500 locations in the United States over the next few years. The company has also collaborated with Delta Electronics for 1,000 chargers in a bid to advance nationwide access to EV charging.
The Zacks Consensus Estimate for EVgo’s 2022 and 2023 sales implies year-over-year growth of 118% and 195%, respectively. The consensus mark for 2022 and 2023 bottom line signals a year-over-year improvement of 35% and 18%, respectively. EVgo currently carries a Zacks Rank #2.
Price and Consensus: EVGO