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Promising Near-Term Prospects for Domestic Auto Industry
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The Zacks Domestic Auto industry includes companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. The vehicles include passenger cars, crossover vehicles, sport utility vehicles (SUVs), trucks, vans, motorcycles and electric vehicles (EVs). The industry, which provides employment to a large number of people, is also at the forefront of innovation, courtesy of its nature as well as the transformation that it is going through. Several companies have engine and transmission plants and conduct research and development (R&D) and testing.
Industry players in the S&P 500 include General Motors (GM - Free Report) and Ford (F - Free Report) , alongside truck manufacturer PACCAR Inc. (PCAR - Free Report) and motor cycle maker Harley-Davidson, Inc. (HOG - Free Report) .
Let’s take a look at the industry’s three major themes:
The Domestic Auto industry, being consumer cyclical, is dependent on business cycle and economic conditions. Stocks within this industry perform well when the economy is expanding and witness a downturn when the economy is contracting. This is mainly because consumers and businesses spend more on discretionary items when they have higher disposable income. The U.S. economy is growing at a steady pace, with third-quarter GDP of this year expanding 2.1% and November jobs data remaining healthy. The hourly wages continued to increase at a faster rate, indicating a growing economy and the lowest unemployment level in 50 years. Optimism surrounding the U.S. economy is expected to boost industry revenues in the near future. Further, amid U.S.-Sino temporary trade truce, China has called off additional tariffs on U.S. manufactured cars, which bodes well for the industry.
The industry is witnessing considerable changes in the operating environment. Widespread usage of technology and rapid digitalization are resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. A host of factors such as pollution issues, technical superiority, stricter fuel-emission standards and increasing adoption by both automakers and customers have turned the fortunes in favor of electric vehicles. Fast progress in artificial intelligence and machine learning is making the seemingly utopian concept of driverless cars a reality. Considering the changing dynamics, there has been a radical change in the business models of auto companies.
With cars becoming more high tech than ever, automobile companies are increasing their capital expenditure on R&D activities. Companies are spending significantly on corporate average fuel economy (CAFE) regulations and electrification of mobility solutions. The increased expenditure is likely to limit cash flows in the near term. Further, technological advancement has contributed to the rise in recalls. Notably, complex functionality and surging digital features in vehicles are proliferating electronic and software glitches. Frequent recalls not only result in significant financial expenses and lower vehicle resale value but also involve reputational costs.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Domestic Auto industry is a 10-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few domestic auto 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 Sector and S&P 500
The Domestic Auto industry has underperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has moved up 12.2% compared with the sector’s increase of 13.5%. The Zacks S&P 500 composite has gained 23.4% in the same time frame.
One-Year 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 10.01X compared with the S&P 500’s 11.73X and the sector’s trailing12-month EV/EBITDA of 8.75X.
Over the past five years, the industry has traded as high as 16.37X, as low as 6.48X and at a median of 11.5X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The near-term prospects of the domestic auto industry appear to be encouraging on factors such as strong economy, bright employment prospects and declining trade tensions. High demand for SUVs and crossovers in place of passenger cars and sedans is also driving growth for domestic auto companies.
The industry is undergoing massive transformation with evolving customer expectations and technological innovation acting as game changers. As such, the industry, which has become extremely competitive, needs consolidation and strategic alliances to reduce the ruinous levels of competition. Amid the changing dynamics of the auto industry, strategic tie-ups among automakers to share R&D costs effectively and fund new technologies like electric and autonomous cars is the need of the hour.
Tesla, Inc. (TSLA - Free Report) : Palo Alto, CA-based Tesla designs, produces and sells electric cars, solar energy generation systems and energy storage product. The company has an expected earnings growth rate of 1,245.4% in 2020.
Price and Consensus: TSLA
Blue Bird Corporation (BLBD - Free Report) : Headquartered in Massachusetts, Blue Bird is engaged in the designing, engineering, manufacturing and sale of school buses and related parts.The company has an expected earnings growth rate of 24.8% for next year.
Price and Consensus: BLBD
Polaris Industries Inc.(PII - Free Report) : Minnesota-based Polaris designs, engineers and manufactures off-road and on-road vehicles. The company has an expected earnings growth rate of 8.5% in 2020.
Price and Consensus: PII
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
Image: Bigstock
Promising Near-Term Prospects for Domestic Auto Industry
The Zacks Domestic Auto industry includes companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. The vehicles include passenger cars, crossover vehicles, sport utility vehicles (SUVs), trucks, vans, motorcycles and electric vehicles (EVs). The industry, which provides employment to a large number of people, is also at the forefront of innovation, courtesy of its nature as well as the transformation that it is going through. Several companies have engine and transmission plants and conduct research and development (R&D) and testing.
Industry players in the S&P 500 include General Motors (GM - Free Report) and Ford (F - Free Report) , alongside truck manufacturer PACCAR Inc. (PCAR - Free Report) and motor cycle maker Harley-Davidson, Inc. (HOG - Free Report) .
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Domestic Auto industry is a 10-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #100, which places it in the top 40% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates strong 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate.
Before we present a few domestic auto 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 Sector and S&P 500
The Domestic Auto industry has underperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has moved up 12.2% compared with the sector’s increase of 13.5%. The Zacks S&P 500 composite has gained 23.4% in the same time frame.
One-Year 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. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 10.01X compared with the S&P 500’s 11.73X and the sector’s trailing12-month EV/EBITDA of 8.75X.
Over the past five years, the industry has traded as high as 16.37X, as low as 6.48X and at a median of 11.5X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
The near-term prospects of the domestic auto industry appear to be encouraging on factors such as strong economy, bright employment prospects and declining trade tensions. High demand for SUVs and crossovers in place of passenger cars and sedans is also driving growth for domestic auto companies.
The industry is undergoing massive transformation with evolving customer expectations and technological innovation acting as game changers. As such, the industry, which has become extremely competitive, needs consolidation and strategic alliances to reduce the ruinous levels of competition. Amid the changing dynamics of the auto industry, strategic tie-ups among automakers to share R&D costs effectively and fund new technologies like electric and autonomous cars is the need of the hour.
Below we are presenting three stocks with a Zacks Rank #2 (Buy) that are well positioned to grow. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Tesla, Inc. (TSLA - Free Report) : Palo Alto, CA-based Tesla designs, produces and sells electric cars, solar energy generation systems and energy storage product. The company has an expected earnings growth rate of 1,245.4% in 2020.
Price and Consensus: TSLA
Blue Bird Corporation (BLBD - Free Report) : Headquartered in Massachusetts, Blue Bird is engaged in the designing, engineering, manufacturing and sale of school buses and related parts.The company has an expected earnings growth rate of 24.8% for next year.
Price and Consensus: BLBD
Polaris Industries Inc.(PII - Free Report) : Minnesota-based Polaris designs, engineers and manufactures off-road and on-road vehicles. The company has an expected earnings growth rate of 8.5% in 2020.
Price and Consensus: PII
Free: Zacks’ Single Best Stock Set to Double
Today you are invited to download our latest Special Report that reveals 5 stocks with the most potential to gain +100% or more in 2020. From those 5, Zacks Director of Research, Sheraz Mian hand-picks one to have the most explosive upside of all.
This pioneering tech ticker had soared to all-time highs and then subsided to a price that is irresistible. Now a pending acquisition could super-charge the company’s drive past competitors in the development of true Artificial Intelligence. The earlier you get in to this stock, the greater your potential gain.
See 5 Stocks Set to Double>>