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2 Buy-Ranked Stocks From the Struggling Auto Equipment Industry
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Prospects of the Zacks Automotive - Original Equipment industry look muted now amid commodity cost inflation, supply chain disruptions and economic concerns. Rising operating costs amid the changing dynamics of the auto industry are also acting as speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses. The performance of the companies will largely depend on smart cost management efforts. Despite multiple odds, two industry players standing tall in an otherwise gloomy industry are Wabash National Corporation (WNC - Free Report) and Innoviz Technologies Ltd. (INVZ - Free Report) .
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 the 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.
Key Themes Shaping the Industry
Cost Pressures Playing Spoilsport: The industry players are likely to suffer from escalating prices of raw materials. Soaring costs of commodities like resin, steel, copper and aluminum have increased the manufacturing costs of the companies. Commodity cost inflation is expected to linger through 2023. Rising freight costs, logistical challenges and manufacturing inefficiencies are likely to further weigh on the gross margins of the auto equipment firms. Further, most industry participants have a global presence, which makes them more vulnerable to forex woes. Adverse foreign currency translations are also likely to impact profits.
Electrification Elevating Capex Needs: Although advanced technologies and the soaring popularity of electric and connected vehicles are providing new opportunities to the industry, these are anticipated to strain the near-term financials of companies. With the technology shift in full swing, original equipment manufacturers must 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.
Concerns of Economic Slowdown: Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. The latest CPI and PPI data reflect that inflation is cooling off at a slower-than-expected pace. There's still a long way to go to get to the Fed's 2% inflation target. To rein in the sticky inflation, the Fed indicated that it plans to keep cranking up the borrowing rates for longer through 2023 before halting further hikes next year. Higher interest rates shoot up the cost of borrowing, escalating the chances of an economic slowdown. The cost of vehicle financing is getting expensive, making it difficult for not-so-affluent shoppers to delay these high-ticket purchases. The risk of slowing vehicle demand may adversely impact the industry participants.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Automotive – Original Equipment industry is a 60-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #181, which places it in the bottom 28% 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 October, the industry’s earnings estimates for 2023 have declined 16.4%.
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 Tops Sector But Lags S&P 500
Over the past year, the Zacks Original Equipment industry has outperformed the broader Auto sector but lagged the Zacks S&P 500 composite. The industry has lost 12.3% compared with the sector and S&P 500’s decline of 31.2% and 7.7%, 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 19.63X compared with the S&P 500’s 12X and the sector’s 13.92X.
Over the past five years, the industry has traded as high as 21.88X, as low as 3.85X and at a median of 7.69X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Bet on
Wabash: Wabash is one of the leading manufacturers of semi-trailers in North America. The company's customer-centric strategy, enhanced distribution capabilities and e-commerce ramp-up seem to be bearing fruit. A solid backlog supported by a long-term customer agreement, including its partnership with J.B. Hunt, augurs well. The company exited 2022 with a record backlog of $3.4 billion, providing significant visibility into 2024 as well. The company generated record sales and profits in 2022. Encouragingly, it expects 2023 revenues to rise 16% year over year and earnings to grow 27%. Balance sheet strength with strong liquidity and no near-term debt maturities are the other positives.
Wabash currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2023 top and bottom line implies year-over-year growth of 24% and 13%, respectively. For the next year, the consensus mark for revenues and EPS indicates an increase of 1.3% and 11.4%, respectively, from the projected 2022 levels. Over the past year, shares of WNC have increased 66.4% against the industry’s decline of 12.3%.
Innoviz:Innoviz provides LiDAR technology solutions. The company is riding on its solid product offerings, including InnovizOne, InnovizTwo, Innoviz360 and Perception Software. Frequent business wins for its LIDAR sensors are fueling the stock. In January, Innoviz clinched contracts with Swiss-based LOXO and France-based Exwayz. The contract with LOXO is for LIDAR sensors to enable driverless capabilities in a fleet of all-electric delivery vehicles. Exwayz intends to integrate the InnovizOne LiDAR system into a variety of non-automotive applications. The company’s forward-looking order book of $6.9 billion offers enough growth visibility.
Innoviz currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 top and bottom line implies year-over-year growth of 42% and 22%, respectively. For the next year, the consensus mark for revenues indicates a whopping surge of 355% from the projected 2022 levels. Over the past year, shares of INVZ have increased 8.3%, in contrast to the industry’s decline of 12.3%.
Price & Consensus: INVZ
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2 Buy-Ranked Stocks From the Struggling Auto Equipment Industry
Prospects of the Zacks Automotive - Original Equipment industry look muted now amid commodity cost inflation, supply chain disruptions and economic concerns. Rising operating costs amid the changing dynamics of the auto industry are also acting as speed bumps. Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses. The performance of the companies will largely depend on smart cost management efforts. Despite multiple odds, two industry players standing tall in an otherwise gloomy industry are Wabash National Corporation (WNC - Free Report) and Innoviz Technologies Ltd. (INVZ - Free Report) .
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 the 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.
Key Themes Shaping the Industry
Cost Pressures Playing Spoilsport: The industry players are likely to suffer from escalating prices of raw materials. Soaring costs of commodities like resin, steel, copper and aluminum have increased the manufacturing costs of the companies. Commodity cost inflation is expected to linger through 2023. Rising freight costs, logistical challenges and manufacturing inefficiencies are likely to further weigh on the gross margins of the auto equipment firms. Further, most industry participants have a global presence, which makes them more vulnerable to forex woes. Adverse foreign currency translations are also likely to impact profits.
Electrification Elevating Capex Needs: Although advanced technologies and the soaring popularity of electric and connected vehicles are providing new opportunities to the industry, these are anticipated to strain the near-term financials of companies. With the technology shift in full swing, original equipment manufacturers must 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.
Concerns of Economic Slowdown: Demand for original equipment depends directly on the sale of vehicles, which, in turn, is heavily reliant on economic growth and consumer confidence. The latest CPI and PPI data reflect that inflation is cooling off at a slower-than-expected pace. There's still a long way to go to get to the Fed's 2% inflation target. To rein in the sticky inflation, the Fed indicated that it plans to keep cranking up the borrowing rates for longer through 2023 before halting further hikes next year. Higher interest rates shoot up the cost of borrowing, escalating the chances of an economic slowdown. The cost of vehicle financing is getting expensive, making it difficult for not-so-affluent shoppers to delay these high-ticket purchases. The risk of slowing vehicle demand may adversely impact the industry participants.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Automotive – Original Equipment industry is a 60-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #181, which places it in the bottom 28% 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 October, the industry’s earnings estimates for 2023 have declined 16.4%.
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 Tops Sector But Lags S&P 500
Over the past year, the Zacks Original Equipment industry has outperformed the broader Auto sector but lagged the Zacks S&P 500 composite. The industry has lost 12.3% compared with the sector and S&P 500’s decline of 31.2% and 7.7%, 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 19.63X compared with the S&P 500’s 12X and the sector’s 13.92X.
Over the past five years, the industry has traded as high as 21.88X, as low as 3.85X and at a median of 7.69X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Bet on
Wabash: Wabash is one of the leading manufacturers of semi-trailers in North America. The company's customer-centric strategy, enhanced distribution capabilities and e-commerce ramp-up seem to be bearing fruit. A solid backlog supported by a long-term customer agreement, including its partnership with J.B. Hunt, augurs well. The company exited 2022 with a record backlog of $3.4 billion, providing significant visibility into 2024 as well. The company generated record sales and profits in 2022. Encouragingly, it expects 2023 revenues to rise 16% year over year and earnings to grow 27%. Balance sheet strength with strong liquidity and no near-term debt maturities are the other positives.
Wabash currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2023 top and bottom line implies year-over-year growth of 24% and 13%, respectively. For the next year, the consensus mark for revenues and EPS indicates an increase of 1.3% and 11.4%, respectively, from the projected 2022 levels. Over the past year, shares of WNC have increased 66.4% against the industry’s decline of 12.3%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: WNC
Innoviz:Innoviz provides LiDAR technology solutions. The company is riding on its solid product offerings, including InnovizOne, InnovizTwo, Innoviz360 and Perception Software. Frequent business wins for its LIDAR sensors are fueling the stock. In January, Innoviz clinched contracts with Swiss-based LOXO and France-based Exwayz. The contract with LOXO is for LIDAR sensors to enable driverless capabilities in a fleet of all-electric delivery vehicles. Exwayz intends to integrate the InnovizOne LiDAR system into a variety of non-automotive applications. The company’s forward-looking order book of $6.9 billion offers enough growth visibility.
Innoviz currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 top and bottom line implies year-over-year growth of 42% and 22%, respectively. For the next year, the consensus mark for revenues indicates a whopping surge of 355% from the projected 2022 levels. Over the past year, shares of INVZ have increased 8.3%, in contrast to the industry’s decline of 12.3%.
Price & Consensus: INVZ