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Foreign Automotive Industry Outlook: Bumpy Ride Ahead

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Companies in the Zacks Automotive – Foreign industry are involved in designing, engineering, manufacturing, distributing, and selling vehicles, components and production systems.
 
In addition to this, some of these companies are also engaged in research and development in the electric and autonomous vehicles, fuel efficiency and low-emission technology.

The industry includes prominent names such as Toyota Motor Corporation (TM - Free Report) , Honda Motor Co., Ltd. (HMC - Free Report) , Daimler AG (DDAIF - Free Report) , Fiat Chrysler Automobiles N.V. (FCAU - Free Report) , NIO Inc. (NIO - Free Report) and others.

Foreign automakers are playing a pivotal role in the global auto space. In fact, auto makers from Japan, Germany, China, South Korea, Italy and France are adding strength, variety and contest to the world auto arena.

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

•    Passenger car sales in China, the largest auto market in the world, declined in 2018 for the first time in nearly three decades. The decline in China doused hopes of robust growth in auto sales in the months ahead. Along with consumers’ waning appetite for passenger cars, lack of demand in other parts of the world such as the United States, the U.K. and Germany is making the journey tougher for global automakers. As rising vehicle prices, unresolved trade spat between the United States and China, uncertainty related to Britain’s pending exit from the European Union and the launch of services such as car sharing are keeping a lid on auto demand, automakers are reorienting business models.

•    These automakers are launching several game-changing products pertaining to electric vehicles, autonomous driving and mobility services. Huge investments are being made in research and development, collaborations and acquisitions of ride-sharing services. The future of the global auto industry rests on these changes.

•    Though demand is easing in the key markets, the global automotive market is continuing to grow. A modest global economic outlook for 2019, along with robust demand in some emerging markets in Asia, have kept hopes for the industry alive. However, the problem of safety still haunts foreign automakers. In recent times, there have been a large number of recalls.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Automotive – Foreign industry is a 21-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #225, which places it at the bottom 13% 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 bleak 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 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 losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined by 0.6%.

Before we present a few 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 Lags on Stock Market Performance

The Zacks Automotive – Foreign industry has lagged the broader Zacks Auto Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 26.3% over this period compared with the S&P 500’s  decline of 6.9% and broader sector’s fall of 23.6%.

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 5.91X compared with the S&P 500’s 10.07X and the sector’s 7.58X.

Over the past five years, the industry has traded as high as 7.75X, as low as 5.59X and at a median of 6.94X, 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 industry is faced with several changes and challenges. Growing trade tensions and adaptability to the changing environment due to transition toward electric vehicles and an autonomous future along with a decline in sales in China will keep automakers on tenterhooks.

Currently, Honda sports a Zacks Rank #1 (Strong Buy).

Below we present two other stocks, namely Fiat and Toyota with a Zacks Rank #2 (Buy) and Zacks Rank #3 (Hold), respectively.

(You can see the complete list of today’s Zacks #1 Rank stocks here.)

Honda: The stock of this Tokyo, Japan-based auto manufacturer has gained 6.8% over the past three months. The Zacks Consensus Estimate for the current-year EPS has been revised 3% upward over the last 60 days.

Price and Consensus: HMC

 
Fiat Chrysler: The stock of this auto manufacturer has gained 6.5% over the past one month. The Zacks Consensus Estimate for the current-year EPS has been revised 9.3% upward over the last 30 days.

Price and Consensus: FCAU


Toyota:  The stock of this Tokyo, Japan-based auto manufacturer has gained 7.3% over the past three months. The Zacks Consensus Estimate for the current-year EPS has remained unchanged over the last 30 days.

Price and Consensus: TM

 
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