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2 Foreign Auto Stocks to Tap the Industry's Continued Positivity
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The surging popularity of environmentally-friendly vehicles is proving to be a substantial advantage for the Zacks Automotive – Foreign industry. The sales of electric vehicles (EVs) are experiencing a remarkable surge in numerous countries, driven by escalating concerns about the climate crisis. Vehicle sales in India and Europe are expected to witness year-over-year growth in 2023, while the outlook for the China auto market remains somewhat muted amid economic weakness. Nonetheless, the overall prospects of the industry remain promising. Notably, the industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Prominent industry participants such as BMW AG (BAMXF - Free Report) and Stellantis (STLA - Free Report) present promising investment opportunities.
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in a fundamental restructuring of the market. Stricter emission and fuel-economy targets, the ramp-up of charging infrastructure as well as supportive government policies are boosting sales of green vehicles. With almost all firms intensifying their electrification game, competition is getting tougher with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency along with low-emission technologies.
Factors to Note
Europe Auto Industry Shows Signs of Promise: The European vehicle market witnessed a significant increase in new car registrations in the first half of 2023. Almost 5.4 million units were sold, up 17.9% from the corresponding period of 2022. New commercial vehicle registrations, including vans, trucks, and buses, increased 11.2%, 20%, and 15%, respectively, in the first half of 2023. Despite macro and affordability headwinds, pent-up demand and the transition to battery-electric vehicles should aid sales. LMC Automotive forecasts car and SUV sales in Western Europe to witness year-over-year growth of 9.2% in 2023 to 11.08 million units. Alix Partners envisions sales in Europe to increase 6% to 15.9 million units this year.
China Vehicle Demand Starts Cooling Off: China's auto sales grew 8.8% in the first half of 2023 due to a surge in electric vehicle purchases. However, growth is slowing as the post-anti-virus economic rebound cools. In July, passenger vehicle sales dropped for the second consecutive month, despite discounts and government incentives. This reluctance to buy cars is influenced by economic uncertainties and a struggling housing market. Car sales in July were 1.79 million units, down 2.6% from the previous year. This reflects a continuation of the contraction seen in June. With weakening demand and heightened price competition, China's largest-in-the-world automobile market is witnessing intensified rivalries among automakers.
India Auto Market Set to Sustain Growth: India achieved its all-time highest vehicle sales last year, surpassing Japan and claiming the position of the third-largest vehicle market in 2022. Passenger vehicle sales surged by about 23% year on year in 2022. India is optimistic about maintaining this growth trajectory in the current year. Crisil forecasts a 9-10% rise in passenger vehicle sales for the fiscal year 2023-24, exceeding pre-pandemic peak levels by roughly 20%, driven by robust demand and improved chip availability. With a positive outlook, India’s automotive industry sets out on a journey of sustained growth momentum in the ongoing year.
Swift E-Mobility Transition:Escalating environmental concerns drive global cities and nations toward eco-friendly energy, with EVs taking center stage. The European Commission aims to phase out new petrol and diesel cars by 2035. China targets fossil fuel car bans by 2030. Japan intends to halt gasoline car sales by mid-2030s. California vows to ban ICE cars by 2035 and sell only electric cars and trucks by 2035 and 2045, respectively. The surging EV targets spark automaker opportunities amid rising consumer confidence. Green vehicle sales are surging, with global EV sales surpassing 10 million in 2022. The International Energy Agency predicts EV sales to rise 35% in 2023 and comprise nearly 20% of global car sales.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Automotive – Foreign industry is a 27-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #77, which places it in the top 31% 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 promising 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since April, the industry’s earnings estimates for 2023 have moved 14.6% north.
Before we present a few stocks that investors can buy given their solid potential, let’s look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500, Tops Sector
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has lost 0.1% compared with the sector’s decline of 20.3%. Meanwhile, the S&P 500 has moved up 4.6% over the same timeframe.
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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.82X compared with the S&P 500’s 13.18X and the sector’s 11.67X.
Over the past five years, the industry has traded as high as 11.53X, as low as 5.61X and at a median of 8.49X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Bet on
BMW AG: It is a Germany-based auto titan that designs, manufactures and distributes luxury vehicles and motorcycles. BMW AG is taking great strides in electrification and expects EVs to account for 50% of its global sales by 2030. For 2023, the company plans to increase its BEV share to 15%. By 2025, the carmaker plans to deliver 2 million fully electric vehicles and by 2030 the number of deliveries would increase to 10 million.
BMW anticipates its deliveries for the year 2023 to surpass those of 2022, driven by increased orders and an improved availability of its luxury vehicles. Its EBIT margin is now expected to range within 9-10.5% up from 8-10% guided earlier. The rollout of the latest premium models and BEVs is expected to be the dominant growth driver for BMW AG. It has pledged to invest around €30 billion toward e-mobility by 2025 end.
BAMXF currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The consensus mark for 2023 sales implies year-over-year growth of 11.3%. The Zacks Consensus Estimate for 2023 and 2024 earnings per share has been upwardly revised by $1.54 and $1.31, respectively, over the past 60 days.
Stellantis: Formed from the merger of Fiat Chrysler and the PSA Group, this Italian-American carmaker is one of the notable names in the auto space. Stellantis’ Dare Forward 2030 strategy bodes well. The core objective of Dare Forward 2030 is to achieve 100% of total passenger car sales in Europe and 50% of light-duty truck and passenger car sales in the United States as battery electric vehicles by the end of the decade.
If Stellantis successfully achieves the given target, it has a higher possibility of doubling its revenues by 2030 compared to the start of the decade, maintaining double-digit adjusted operating margins throughout the decade and becoming number one in providing exceptional products and services in every market by 2030. By 2025, Stellantis plans to invest a total of EUR 30 billion in electrification technology to provide best-in-class BEVs to its customers.
STLA currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The consensus mark for 2023 sales and earnings implies year-over-year growth of 7.5% and 4.6%, respectively. The Zacks Consensus Estimate for 2023 earnings per share has been upwardly revised by 35 cents over the past seven days.
Price & Consensus: STLA
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2 Foreign Auto Stocks to Tap the Industry's Continued Positivity
The surging popularity of environmentally-friendly vehicles is proving to be a substantial advantage for the Zacks Automotive – Foreign industry. The sales of electric vehicles (EVs) are experiencing a remarkable surge in numerous countries, driven by escalating concerns about the climate crisis. Vehicle sales in India and Europe are expected to witness year-over-year growth in 2023, while the outlook for the China auto market remains somewhat muted amid economic weakness. Nonetheless, the overall prospects of the industry remain promising. Notably, the industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Prominent industry participants such as BMW AG (BAMXF - Free Report) and Stellantis (STLA - Free Report) present promising investment opportunities.
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in a fundamental restructuring of the market. Stricter emission and fuel-economy targets, the ramp-up of charging infrastructure as well as supportive government policies are boosting sales of green vehicles. With almost all firms intensifying their electrification game, competition is getting tougher with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency along with low-emission technologies.
Factors to Note
Europe Auto Industry Shows Signs of Promise: The European vehicle market witnessed a significant increase in new car registrations in the first half of 2023. Almost 5.4 million units were sold, up 17.9% from the corresponding period of 2022. New commercial vehicle registrations, including vans, trucks, and buses, increased 11.2%, 20%, and 15%, respectively, in the first half of 2023. Despite macro and affordability headwinds, pent-up demand and the transition to battery-electric vehicles should aid sales. LMC Automotive forecasts car and SUV sales in Western Europe to witness year-over-year growth of 9.2% in 2023 to 11.08 million units. Alix Partners envisions sales in Europe to increase 6% to 15.9 million units this year.
China Vehicle Demand Starts Cooling Off: China's auto sales grew 8.8% in the first half of 2023 due to a surge in electric vehicle purchases. However, growth is slowing as the post-anti-virus economic rebound cools. In July, passenger vehicle sales dropped for the second consecutive month, despite discounts and government incentives. This reluctance to buy cars is influenced by economic uncertainties and a struggling housing market. Car sales in July were 1.79 million units, down 2.6% from the previous year. This reflects a continuation of the contraction seen in June. With weakening demand and heightened price competition, China's largest-in-the-world automobile market is witnessing intensified rivalries among automakers.
India Auto Market Set to Sustain Growth: India achieved its all-time highest vehicle sales last year, surpassing Japan and claiming the position of the third-largest vehicle market in 2022. Passenger vehicle sales surged by about 23% year on year in 2022. India is optimistic about maintaining this growth trajectory in the current year. Crisil forecasts a 9-10% rise in passenger vehicle sales for the fiscal year 2023-24, exceeding pre-pandemic peak levels by roughly 20%, driven by robust demand and improved chip availability. With a positive outlook, India’s automotive industry sets out on a journey of sustained growth momentum in the ongoing year.
Swift E-Mobility Transition:Escalating environmental concerns drive global cities and nations toward eco-friendly energy, with EVs taking center stage. The European Commission aims to phase out new petrol and diesel cars by 2035. China targets fossil fuel car bans by 2030. Japan intends to halt gasoline car sales by mid-2030s. California vows to ban ICE cars by 2035 and sell only electric cars and trucks by 2035 and 2045, respectively. The surging EV targets spark automaker opportunities amid rising consumer confidence. Green vehicle sales are surging, with global EV sales surpassing 10 million in 2022. The International Energy Agency predicts EV sales to rise 35% in 2023 and comprise nearly 20% of global car sales.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Automotive – Foreign industry is a 27-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #77, which places it in the top 31% 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 promising 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Since April, the industry’s earnings estimates for 2023 have moved 14.6% north.
Before we present a few stocks that investors can buy given their solid potential, let’s look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500, Tops Sector
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has lost 0.1% compared with the sector’s decline of 20.3%. Meanwhile, the S&P 500 has moved up 4.6% over the same timeframe.
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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 10.82X compared with the S&P 500’s 13.18X and the sector’s 11.67X.
Over the past five years, the industry has traded as high as 11.53X, as low as 5.61X and at a median of 8.49X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Bet on
BMW AG: It is a Germany-based auto titan that designs, manufactures and distributes luxury vehicles and motorcycles. BMW AG is taking great strides in electrification and expects EVs to account for 50% of its global sales by 2030. For 2023, the company plans to increase its BEV share to 15%. By 2025, the carmaker plans to deliver 2 million fully electric vehicles and by 2030 the number of deliveries would increase to 10 million.
BMW anticipates its deliveries for the year 2023 to surpass those of 2022, driven by increased orders and an improved availability of its luxury vehicles. Its EBIT margin is now expected to range within 9-10.5% up from 8-10% guided earlier. The rollout of the latest premium models and BEVs is expected to be the dominant growth driver for BMW AG. It has pledged to invest around €30 billion toward e-mobility by 2025 end.
BAMXF currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The consensus mark for 2023 sales implies year-over-year growth of 11.3%. The Zacks Consensus Estimate for 2023 and 2024 earnings per share has been upwardly revised by $1.54 and $1.31, respectively, over the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: BAMXF
Stellantis: Formed from the merger of Fiat Chrysler and the PSA Group, this Italian-American carmaker is one of the notable names in the auto space. Stellantis’ Dare Forward 2030 strategy bodes well. The core objective of Dare Forward 2030 is to achieve 100% of total passenger car sales in Europe and 50% of light-duty truck and passenger car sales in the United States as battery electric vehicles by the end of the decade.
If Stellantis successfully achieves the given target, it has a higher possibility of doubling its revenues by 2030 compared to the start of the decade, maintaining double-digit adjusted operating margins throughout the decade and becoming number one in providing exceptional products and services in every market by 2030. By 2025, Stellantis plans to invest a total of EUR 30 billion in electrification technology to provide best-in-class BEVs to its customers.
STLA currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The consensus mark for 2023 sales and earnings implies year-over-year growth of 7.5% and 4.6%, respectively. The Zacks Consensus Estimate for 2023 earnings per share has been upwardly revised by 35 cents over the past seven days.
Price & Consensus: STLA