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Coronavirus Mars Domestic Auto Industry's Near-Term Outlook
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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, trucks, vans, motorcycles and electric vehicles. The industry, which 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. Several companies from the industry 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 likely to bear the brunt of COVID-19 pandemic, which has wreaked havoc on the economy. The industry is in disarray amid factory shutdown and supply chain disruptions due to the coronavirus outbreak. Consumers’ confidence and demand for vehicles have declined, which are likely to affect near-term earnings and revenues of automakers. U.S. auto biggie Ford warned investors of first-quarter 2020 loss and dismal revenues, thanks to the coronavirus outbreak. Amid coronavirus-induced uncertainty, most of the automakers have withdrawn annual guidance.
As COVID-19 has stifled vehicle demand and dimmed earnings prospects, automakers are now slashing salaries and in some cases furloughing employees without pay. In a bid to preserve cash in the wake of coronavirus-led financial crisis, companies are resorting to various cost-containment measures. Dividend cuts, buyback suspension, employee layoffs, pay cuts and hiring freezes are becoming commonplace. Although these strategic actions might aid margins to a certain extent, these will not likely be enough to offset revenue declines from tumbling demand, given how gravely the virus outbreak is weighing on the industry.
Widespread usage of technology and rapid digitization 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. 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 capital expenditure on R&D activities. Complex functionality and surging digital features in vehicles are also 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 Paints a Gloomy Picture
The Zacks Domestic Auto industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #245, which places it in the bottom 3% 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 weak 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. Over the past year, the industry’s earnings estimates for the current year have declined 68.3%.
Despite the industry’s dim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Tops Sector and S&P 500
The Domestic Auto industry has outperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 16.7% against the sector and S&P 500’s decline of 12.3% and 4.6%, respectively.
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 13.94X compared with the S&P 500’s 10.17X and the sector’s 9.11X.
Over the past five years, the industry has traded as high as 16.55X, as low as 6.37X and at a median of 11.87X, as depicted in the chart below.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
Bottom Line
The COVID-19 pandemic has resulted in unprecedented challenges for the auto sector, thereby creating a demand shock as consumers’ confidence has dropped significantly. Coronavirus-induced damage has been done much and the situation is unlikely to improve anytime soon. Given the rate at which the virus is spreading and the fact that customers are likely to put off spending on big-ticket discretionary items for quite some time, carmakers are unlikely to churn sizable profits for a while. The pandemic is likely to dent near-term cash flows and weaken balance sheets of various auto firms. Hence, the overall sentiment surrounding the industry is extremely bleak.
None of the stocks in the industry sports a Zacks Rank #1 (Strong Buy) or #2 (Buy). So we are presenting two stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Tesla (TSLA - Free Report) : This Palo Alto, CA-based EV maker has an expected earnings growth of 3,446.5% for the current fiscal year. The company also has an estimated long-term earnings growth rate of 36.5%.
Ford: This Dearborn, MI-based auto giant surpassed earnings estimates in three out of last four quarters. The company has an estimated long-term earnings growth rate of 6.1%.
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Coronavirus Mars Domestic Auto Industry's Near-Term Outlook
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, trucks, vans, motorcycles and electric vehicles. The industry, which 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. Several companies from the industry 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 Paints a Gloomy Picture
The Zacks Domestic Auto industry is a nine-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #245, which places it in the bottom 3% 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 weak 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. Over the past year, the industry’s earnings estimates for the current year have declined 68.3%.
Despite the industry’s dim near-term prospects, we will present a few stocks worth considering for your portfolio. But before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Tops Sector and S&P 500
The Domestic Auto industry has outperformed both the sector and the Zacks S&P 500 composite over the past year. Over this period, the industry has gained 16.7% against the sector and S&P 500’s decline of 12.3% and 4.6%, respectively.
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 13.94X compared with the S&P 500’s 10.17X and the sector’s 9.11X.
Over the past five years, the industry has traded as high as 16.55X, as low as 6.37X and at a median of 11.87X, as depicted in the chart below.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
Bottom Line
The COVID-19 pandemic has resulted in unprecedented challenges for the auto sector, thereby creating a demand shock as consumers’ confidence has dropped significantly. Coronavirus-induced damage has been done much and the situation is unlikely to improve anytime soon. Given the rate at which the virus is spreading and the fact that customers are likely to put off spending on big-ticket discretionary items for quite some time, carmakers are unlikely to churn sizable profits for a while. The pandemic is likely to dent near-term cash flows and weaken balance sheets of various auto firms. Hence, the overall sentiment surrounding the industry is extremely bleak.
None of the stocks in the industry sports a Zacks Rank #1 (Strong Buy) or #2 (Buy). So we are presenting two stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Tesla (TSLA - Free Report) : This Palo Alto, CA-based EV maker has an expected earnings growth of 3,446.5% for the current fiscal year. The company also has an estimated long-term earnings growth rate of 36.5%.
Ford: This Dearborn, MI-based auto giant surpassed earnings estimates in three out of last four quarters. The company has an estimated long-term earnings growth rate of 6.1%.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
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