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Foreign Automotive Industry Outlook: Treading a Rough Road

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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.

Some of these companies are also engaged in research and development of electric and autonomous vehicles, fuel efficiency and low-emission technology.

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

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

  • Waning demand for passenger cars and lack of demand in regions like the United States, the U.K. and Germany are making it tough for global automakers. Also, rising vehicle prices, uncertainty related to Britain’s exit from the European Union and launch of services such as car sharing have prompted automakers to reorient their business models.
     
  • Automakers across the globe are making huge investments in research and development, collaborations and acquisitions of ride-sharing services, and electric vehicles. Various products pertaining to electric vehicles, autonomous driving and mobility services are entering the market. The future of the global auto industry rests on these changes.
     
  • Though demand is easing in key markets, the global automotive market is continuing to grow. The balancing combination of modest global economic outlook for 2019 with robust demand in some emerging markets of Asia has kept hopes for the industry alive. However, ensuring safety is still a critical challenge for global automakers.


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 #208, which places it at the bottom 19% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all 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 position 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 23.5%.

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 24.9% over this period compared with the broader sector’s fall of 20.7%. The S&P 500 rose 2.3%.

One-Year Price Performance


 

Industry’s Current Valuation

On the basis of the 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 5.52X compared with the S&P 500’s 10.71X and the sector’s 8.84X.

Over the past five years, the industry has traded as high as 7.72X, as low as 5.44X and at a median of 6.89X, 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. Rising trade tensions, adapting to the transition toward electric vehicles and an autonomous future along with a decline in China sales will keep the ride bumpy for automakers.

Below we present two stocks, namely, Tata Motors Ltd (TTM - Free Report) and Geely Automobile Holdings Ltd. (GELYY - Free Report) , with a Zacks Rank #2 (Buy)

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

Tata Motors: The stock of this leading Indian auto manufacturer has gained 3.6% over the past three months. The Zacks Consensus Estimate for the current-year EPS has been revised 3.5% upward over the last 30 days.

Price and Consensus: TTM

 
Geely Automobile:
The stock of this Hong Kong-based auto manufacturer has declined 19.4% over the past three months. Meanwhile, the Zacks Consensus Estimate for the current-year EPS has been revised 2.2% upward over the last 60 days.

Price and Consensus: GELYY



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