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3 Best Buys From the Promising Foreign Auto Industry
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The escalating global demand for environment-friendly vehicles is a key growth engine for the Zacks Automotive – Foreign industry. Electric vehicle (EV) sales are surging worldwide due to heightened concerns about the climate crisis. Anticipated year-over-year growth in vehicle sales is expected in India, Japan and Europe in 2023. However, the outlook for the Chinese auto market is somewhat muted amid economic challenges. Nevertheless, the overall industry outlook remains rosy. The industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Key industry players like Toyota (TM - Free Report) , Stellantis (STLA - Free Report) and Honda (HMC - Free Report) offer appealing 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 and low-emission technologies.
Things to Note
European Vehicle Market Exhibits Cautious Optimism: The European Union (EU) experienced a 9.2% increase in new passenger car sales in September, marking the 14th consecutive month of growth. Over the first nine months of the year, EU car sales surged 17%, totaling 7.9 million units. Having said that, the market remains about 20% below the pre-pandemic level of 2019. But on an encouraging note, LMC Automotive has upgraded 2023 sales growth forecast for Western Europe's sedans and SUVs to 10.7%, reaching 11.23 million units. While this is below the 2019 peak of 14.3 million, it does signal a positive trajectory toward recovery. The macroeconomic environment, marked by high interest rates and subdued economic growth, indeed poses challenges. However, LMC emphasizes that, given backlogs and the low base in 2022, growth remains a foundational assumption.
Japan’s Auto Market on the Recovery Track: Japan's new vehicle sales experienced year-over-year growth of 10.7% in October 2023, reaching 397,672 units. The January-October period saw a 15.1% increase, totaling 4,005,158 units. The Japanese automotive market is currently benefiting from notably improved supply conditions. This is reflected in reduced waiting periods for popular models like the Honda N-Box Mini Car and the Nissan Note, which now stand at one to two months. GlobalData predicts 11% growth in the Japanese light vehicle market for 2023, surpassing 4.6 million units. Despite falling short of the more than 5 million units per year recorded in 2017-2019, the recent sales surge indicates a promising reversal after four consecutive years of contraction, instilling confidence in the industry's upward trajectory.
China Auto Market Uncertainty: China witnessed a 9.9% rise in passenger vehicle sales in October, reaching 2.05 million units and marking the third consecutive month of growth. Over the first 10 months of 2023, sales rose 3% year on year, totaling around 17.3 million units. While supportive government policies bolster the market, China's status as the world's largest auto market is clouded by economic challenges. A price war initiated by Tesla at the start of the year is exacerbating the industry's profitability concerns amid a sluggish macroeconomic environment. The China Passenger Car Association expressed uncertainty about November's outlook, citing a "complex and severe" economic landscape.
India’s Impressive Growth Momentum: India secured its place as the world's third-largest vehicle market in 2022, surpassing Japan and achieving record-high sales. The nation's burgeoning middle class, increasing disposable incomes, improved road infrastructure and accessible financing escalated demand for automobiles. Projected to persist, the automotive industry anticipates sustained high single-digit growth across various segments in the current fiscal. This positive trajectory is supported by factors such as rising per capita incomes, a favorable demographic profile and favorable policy environments, including infrastructure development. With these conducive conditions, India's automotive sector reflects a promising outlook.
Electrifying Transportation Landscape: Mounting environmental concerns are driving a global shift toward sustainable energy, placing EVs at the forefront. The European Commission aims to eliminate new petrol and diesel cars by 2035, China targets fossil fuel car bans by 2030, and Japan plans to cease gasoline car sales by the mid-2030s. California pledges to ban internal combustion engine cars by 2035, selling only electric cars and trucks by 2035 and 2045. These bold EV targets present opportunities for automakers. Global EV sales exceeded 10 million in 2022, with the International Energy Agency forecasting a 35% increase in EV sales in 2023, constituting almost 20% of global car sales.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #48, which places it in the top 19% 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 decent 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.
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 Tops Sector & S&P 500
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has rallied 22.6% compared with the S&P 500’s growth of 10.4%. Meanwhile, the auto sector has inched down 0.2% 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 9.26X compared with the S&P 500’s 12.59X and the sector’s 11.91X.
Over the past five years, the industry has traded as high as 11.17X, as low as 5.61X and at a median of 8.63X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
Stocks to Buy
Toyota: The Japanese carmaker is one of the world’s leading automakers, with an array of brands, including Toyota, Lexus and Scion, which position it for solid growth. To capitalize on the accelerated global shift to environment-friendly vehicles, the auto giant is deepening its focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness. The Japanese auto giant aims to generate 40% of its global sales from EVs by 2025 and 70% by 2030. Last week, Toyota also reported stellar quarterly earnings. Earnings crushed estimates and doubled from the last year. The company also raised fiscal 2024 guidance and increased its dividend and share repurchase program.
The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 10.5% and 29.7%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by 46 cents and 26 cents, respectively, in the past 30 days. The stock currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A.
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.
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. STLA currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
Price & Consensus: STLA
Honda: Toyota’s closest peer, Honda is one of the prominent manufacturers of automobiles and the largest producer of motorcycles in the world. Honda’s 2030 Vision, which emphasizes electrified mobility products, bodes well. Honda targets EVs to account for 20% of its sales in Japan and 40% of its sales in North America and China by the decade's end. Its joint venture with GAC Group and Dongfeng Motor Group will drive its EV prospects in China. As part of the global restructuring move, Honda has been taking steps to control costs and optimize production capacity. The company released its quarterly results yesterday and handily beat earnings estimates. Moreover, it lifted sales and profit projections for fiscal 2024, which sparked optimism.
The Zacks Consensus Estimate for HMC’s fiscal 2024 sales and EPS implies year-over-year growth of 7.7% and 31%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by 9 cents and 24 cents, respectively, in the past 30 days. The stock currently carries a Zacks Rank #2 and has a VGM Score of A.
Price & Consensus: HMC
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3 Best Buys From the Promising Foreign Auto Industry
The escalating global demand for environment-friendly vehicles is a key growth engine for the Zacks Automotive – Foreign industry. Electric vehicle (EV) sales are surging worldwide due to heightened concerns about the climate crisis. Anticipated year-over-year growth in vehicle sales is expected in India, Japan and Europe in 2023. However, the outlook for the Chinese auto market is somewhat muted amid economic challenges. Nevertheless, the overall industry outlook remains rosy. The industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Key industry players like Toyota (TM - Free Report) , Stellantis (STLA - Free Report) and Honda (HMC - Free Report) offer appealing 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 and low-emission technologies.
Things to Note
European Vehicle Market Exhibits Cautious Optimism: The European Union (EU) experienced a 9.2% increase in new passenger car sales in September, marking the 14th consecutive month of growth. Over the first nine months of the year, EU car sales surged 17%, totaling 7.9 million units. Having said that, the market remains about 20% below the pre-pandemic level of 2019. But on an encouraging note, LMC Automotive has upgraded 2023 sales growth forecast for Western Europe's sedans and SUVs to 10.7%, reaching 11.23 million units. While this is below the 2019 peak of 14.3 million, it does signal a positive trajectory toward recovery. The macroeconomic environment, marked by high interest rates and subdued economic growth, indeed poses challenges. However, LMC emphasizes that, given backlogs and the low base in 2022, growth remains a foundational assumption.
Japan’s Auto Market on the Recovery Track: Japan's new vehicle sales experienced year-over-year growth of 10.7% in October 2023, reaching 397,672 units. The January-October period saw a 15.1% increase, totaling 4,005,158 units. The Japanese automotive market is currently benefiting from notably improved supply conditions. This is reflected in reduced waiting periods for popular models like the Honda N-Box Mini Car and the Nissan Note, which now stand at one to two months. GlobalData predicts 11% growth in the Japanese light vehicle market for 2023, surpassing 4.6 million units. Despite falling short of the more than 5 million units per year recorded in 2017-2019, the recent sales surge indicates a promising reversal after four consecutive years of contraction, instilling confidence in the industry's upward trajectory.
China Auto Market Uncertainty: China witnessed a 9.9% rise in passenger vehicle sales in October, reaching 2.05 million units and marking the third consecutive month of growth. Over the first 10 months of 2023, sales rose 3% year on year, totaling around 17.3 million units. While supportive government policies bolster the market, China's status as the world's largest auto market is clouded by economic challenges. A price war initiated by Tesla at the start of the year is exacerbating the industry's profitability concerns amid a sluggish macroeconomic environment. The China Passenger Car Association expressed uncertainty about November's outlook, citing a "complex and severe" economic landscape.
India’s Impressive Growth Momentum: India secured its place as the world's third-largest vehicle market in 2022, surpassing Japan and achieving record-high sales. The nation's burgeoning middle class, increasing disposable incomes, improved road infrastructure and accessible financing escalated demand for automobiles. Projected to persist, the automotive industry anticipates sustained high single-digit growth across various segments in the current fiscal. This positive trajectory is supported by factors such as rising per capita incomes, a favorable demographic profile and favorable policy environments, including infrastructure development. With these conducive conditions, India's automotive sector reflects a promising outlook.
Electrifying Transportation Landscape: Mounting environmental concerns are driving a global shift toward sustainable energy, placing EVs at the forefront. The European Commission aims to eliminate new petrol and diesel cars by 2035, China targets fossil fuel car bans by 2030, and Japan plans to cease gasoline car sales by the mid-2030s. California pledges to ban internal combustion engine cars by 2035, selling only electric cars and trucks by 2035 and 2045. These bold EV targets present opportunities for automakers. Global EV sales exceeded 10 million in 2022, with the International Energy Agency forecasting a 35% increase in EV sales in 2023, constituting almost 20% of global car sales.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #48, which places it in the top 19% 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 decent 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.
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 Tops Sector & S&P 500
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has rallied 22.6% compared with the S&P 500’s growth of 10.4%. Meanwhile, the auto sector has inched down 0.2% 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 9.26X compared with the S&P 500’s 12.59X and the sector’s 11.91X.
Over the past five years, the industry has traded as high as 11.17X, as low as 5.61X and at a median of 8.63X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
Stocks to Buy
Toyota: The Japanese carmaker is one of the world’s leading automakers, with an array of brands, including Toyota, Lexus and Scion, which position it for solid growth. To capitalize on the accelerated global shift to environment-friendly vehicles, the auto giant is deepening its focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness. The Japanese auto giant aims to generate 40% of its global sales from EVs by 2025 and 70% by 2030. Last week, Toyota also reported stellar quarterly earnings. Earnings crushed estimates and doubled from the last year. The company also raised fiscal 2024 guidance and increased its dividend and share repurchase program.
The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 10.5% and 29.7%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by 46 cents and 26 cents, respectively, in the past 30 days. The stock currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: TM
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.
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. STLA currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A.
Price & Consensus: STLA
Honda: Toyota’s closest peer, Honda is one of the prominent manufacturers of automobiles and the largest producer of motorcycles in the world. Honda’s 2030 Vision, which emphasizes electrified mobility products, bodes well. Honda targets EVs to account for 20% of its sales in Japan and 40% of its sales in North America and China by the decade's end. Its joint venture with GAC Group and Dongfeng Motor Group will drive its EV prospects in China. As part of the global restructuring move, Honda has been taking steps to control costs and optimize production capacity. The company released its quarterly results yesterday and handily beat earnings estimates. Moreover, it lifted sales and profit projections for fiscal 2024, which sparked optimism.
The Zacks Consensus Estimate for HMC’s fiscal 2024 sales and EPS implies year-over-year growth of 7.7% and 31%, respectively. The earnings estimate for fiscal 2024 and 2025 has been revised upward by 9 cents and 24 cents, respectively, in the past 30 days. The stock currently carries a Zacks Rank #2 and has a VGM Score of A.
Price & Consensus: HMC