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2 Top-Ranked Domestic Auto Stocks to Drive Portfolio Gains

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The outlook for the Zacks Domestic Auto industry is optimistic, fueled by sustained vehicle demand and improved inventory levels, facilitating generous discounts to boost sales. While sales growth may slow down this year compared to 2023, the overall trajectory remains positive, benefiting industry giants. Additionally, the cost of vehicle financing is projected to decrease. Despite the slower-than-expected adoption of electric vehicles, sales are anticipated to surpass 2023 levels. Overall, industry sentiment is upbeat, with top-ranked stocks such as General Motors (GM - Free Report) and PACCAR (PCAR - Free Report) positioned as attractive options to capitalize on the industry's strengths.

Industry Overview

The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and provides employment to a large number of people — is at the forefront of innovation, courtesy of its nature and the transformation that it is going through. The widespread usage of technology and rapid digitization are resulting in the fundamental restructuring of the automotive market. Several companies in the industry have engine and transmission plants and conduct research and development, and testing of electric and autonomous vehicles.

Key Investing Themes

Sales to Continue Upward Trajectory Albeit at a Slower Pace: New vehicle sales in the United States reached their highest levels in 2023 since 2019 thanks to pent-up demand, improved inventories, attractive incentives and a rise in fleet sales. While sales are expected to rise in 2024 as well, the growth rate is expected to decelerate, as much of the pent-up demand was largely absorbed in 2023. With the Fed expected to cut rates thrice this year, the cost of vehicle financing is likely to decline, which might help in fueling sales volumes.

Easing Supply Chain Issues: Supply chain snarls, an aftermath of COVID-19, have been considerably alleviated. New vehicle inventory has sharply rebounded. Per J.D. Power and GlobalData estimates, inventory levels were at about 1.6 million vehicles at the end of last month, a 3.3% increase from December and a 38% jump from January 2023. Cox Automotive expects new vehicle inventory to return to pre-pandemic levels in 2024, reaching almost 3 million units, tripling the quantity during the chip shortage. Ample inventory will result in enhanced incentives and discounts for consumers, helping to stabilize vehicle prices and reduce affordability concerns.

E-Mobility Growth Amid Challenges: The outlook for the EV industry remains promising but nuanced. While demand for EVs is on the rise, achieving higher sales will require concerted efforts from dealers and manufacturers. Despite initial optimism, the shift from lofty expectations to realistic projections reflects the slower-than-anticipated pace of customer acceptance. Consequently, some major automakers are revising their ambitious EV plans. However, the industry is poised for expansion in 2024, with an increasing variety of EV models, higher incentives, discounts, advertising and sales initiatives. Cox Automotive forecasts EV sales in the United States to surpass the 1 million unit milestone achieved in 2023. This signals a continued momentum toward electrification, albeit with an understanding that overcoming consumer hesitancy remains a key challenge.

Encouraging Zacks Industry Rank

The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #103, which places it in the top 41% of 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging 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 gaining confidence in this group’s earnings growth potential.

Before we present you two top-ranked stocks from the industry, let's take a look at the industry’s stock market performance and current valuation.

Industry Lags Sector and S&P 500

The Domestic Auto industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The industry has lost 16.4% against the S&P 500’s rally of 28.7%. The sector has inched up 0.5% over the said time frame.

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 15.42X compared with the S&P 500’s 14.28X and the sector’s 13.66X. Over the past five years, the industry has traded as high as 60.03X, as low as 9.32X and at a median of 22.72X, as the chart below shows.

EV/EBITDA Ratio (Past Five Years)

2 Best Buys

General Motors: One of the world’s largest automakers, General Motors held the largestshare of the U.S. auto market at 16.2% in 2023. General Motors’ compelling portfolio with strong demand for its quality full-size pickups and SUVs bodes well. The company’s hot-selling brands in America, like Chevrolet Silverado, Equinox and GMC Sierra, are driving the top line. 

The automaker plans to roll out 30 fresh EV models by 2025-end. Solid demand for GMC Hummer EV, Chevrolet Bolt EV and EUV, Cadillac Lyric, Equinox EV, Silverdo EV, Sierra EV, Blazer EV and BrightDrop Zevo 600 is expected to boost sales. The company's Ultium platform and battery plants in Ohio, Tennessee and Lansing are set to scale up its e-mobility prowess. Its superior liquidity profile and cost-containment efforts also instill confidence. General Motors’ strides in autonomous vehicle development also augur well for long-term growth.

GM currently has a Zacks Rank #1 (Strong Buy) and a Value Score of A. The Zacks Consensus Estimate for General Motors’ 2024 sales and earnings implies year-over-year growth of 1.8% and 17.2%, respectively. The consensus mark for GM’s 2024 and 2025 EPS has moved north by $1.27 and $1.70, respectively, over the past 30 days. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 19.9%.

Price & Consensus: GM

PACCAR: Headquartered in Bellevue, PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The company achieved record revenues and net income in 2023. It expects solid order intake in North America this year. Continued growth in aftermarket parts — which is a high margin and a less cyclic business, thanks to the rampant adoption of its proprietary MX engine — bodes well. 

Accelerated efforts toward electrification, connected vehicle services and advanced driver-assistance system options are set to bolster PACCAR’s prospects. A solid balance sheet with low leverage is another tailwind. PACCAR’s strong balance sheet is complemented by A+ and A1 credit ratings assigned by Standard & Poor's and Moody's, respectively.

PACCAR currently carries a Zacks Rank #1 and has a VGM Score of B.  The consensus mark for PCAR’s 2024 and 2025 EPS has moved north by 19 cents and 6 cents, respectively, over the past 30 days. The Zacks Consensus Estimate for PACCAR’s 2025 sales and earnings implies year-over-year growth of 8.2% and 10.3%, respectively. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 17.1%.

Price & Consensus: PCAR

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

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