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Bumpy Road Ahead for Foreign Automotive Industry Stocks

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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.

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

 

  • The foreign automotive industry, being consumer cyclical, is dependent on business cycle and economic conditions. Concerns related to economic slowdown have been dampening demand for passenger cars globally, especially in the United Kingdom, China and Germany among others. Sluggish demand in the world’s biggest auto market, China, has been hurting carmakers doing brisk business in the country.Slowing economy and trade war tensions impacted consumer sentiment.Although the trade tiff seems to be easing now with a phase one trade deal between the United States and China, things will likely remain under pressure unless the dispute is fully resolved. The coronavirus epidemic is further denting the country’s auto market. Notably, per CAAM and World Bank projections, auto sales in China are likely to decelerate this year as well.
     
  • Apart from economic slowdown and lower consumer confidence, there are other reasons for lower car sales. Emission issues are also a concern for carmakers, as the industry is fighting new CO2 rules. Ban on diesel cars, increasing regulatory costs and soft market conditions will be tough for Western European markets. India’s adoption of BS-VI by 2020 along with other norms to tackle global warming issue are also factors impacting sales. As a result of the changing emission norms, auto companies are investing heavily on advanced technologies and alternative fuels. As such, it is becoming expensive to build cars. The resultant increase in vehicle price is also leading to decline in sales. Further, increased transition from ownership of vehicles to reliance on ride sharing platforms like Uber among others is also impacting sales. The future of the global auto industry rests on these changes.
     
  • The industry is witnessing considerable changes in 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 work in favor of electric vehicles. Rapid 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.

 

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 #190, which places it in the bottom 25% 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 21.2%.

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 S&P 500 & Sector

The Zacks Automotive – Foreign industry has lagged the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has witnessed growth of 4.6% compared with the S&P 500 and sector’s rise of 20.9% and 14.6%, respectively.

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. 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 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 5.76X compared with the S&P 500’s 12.31X and the sector’s 8.97X.

Over the past five years, the industry has traded as high as 7.71X, as low as 5.43X and at a median of 6.75X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 

 

Bottom Line

Contracting demand amid global economic slowdown, challenging market conditions and tougher emission rules across the globe are likely to remain concerns in the near term. Ride sharing platforms are also making the ownership of cars less appealing. The transition toward electric vehicles and autonomous driving will keep automakers on tenterhooks.

Despite the downbeat mood in the industry, we are presenting two stocks with a Zacks Rank #1 (Strong Buy) that are well positioned to gain amid the prevailing challenges. There are also two stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio. You can see the complete list of today’s Zacks #1 Rank  stocks here.

Fiat Chrysler Automobiles FCAU: This Italian-American carmaker sports a Zacks Rank #1. The Zacks Consensus Estimate for 2020 earnings has increased by 6 cents to $3.01.

Price and Consensus: FCAU

BMW Ag (BAMXF - Free Report) : This German carmaker sports a Zacks Rank #1 and has an expected earnings growth of 16.2% for fiscal 2020.

Price and Consensus: BAMXF

Daimler AG DDAIF: Headquartered in Germany, Daimler carries a Zacks Rank #3 and has an expected earnings growth of 9.9% for the next year.

Price and Consensus: DDAIF

Nissan Motor Company NSANY: This Japanese automaker carries a Zacks Rank #3 and has an expected earnings growth of 188.7% for the next year.

Price and Consensus: NSANY

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