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3 Stocks to Gain From Long-Term Prospects of Auto Market

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With technological innovations progressing at an unprecedented rate, the global automobile industry is expected to rake in billions in the upcoming years. Reports suggest that sales in new vehicles will cross 98 million units in 2018 globally, up 2.5% year over year.

Focus on R&D, solid prospects in the emerging economies, artificial intelligence (AI) enabling autonomous driving technology, big data-enhanced geo analytical capabilities, strong role of OEMs (Original Equipment Manufacturers), smart-phone penetration, car rentals and car sharing are the major drivers of the automotive industry.

So, here we take a peek at the major trends that are likely to boost the global automotive sector in the next five years.

Three Trends Boosting US Auto Market

Electric Vehicles (EV)

Per a Bloomberg report, electric cars comprise only 1% of auto sales worldwide as of now. By 2025, the metric is expected to reach 10% globally (LMC Automotive).

Per a research report by Investor’s Business Daily, EVs will have 40-50% share of the global auto market by 2040. General Motors (GM - Free Report) plans to sell 1 million electric vehicles a year by 2026, including electric trucks and SUVs. Tesla (TSLA - Free Report) aims to build 1 million cars in 2020. Ford and Volkswagen AG are supposedly planning new electric lineups in China. Recently, Toyota Motor announced to launch more than 10 electric models by the next decade.

In total, more than 127 EVs will be introduced worldwide in the next five years, with 75 new models in the United States alone (Bloomberg).


Car Sharing

Individual car ownership has become very expensive these days. Also, regulatory authorities are seeking ways to make the busiest cities around the world less polluted and congested via punitive taxation on private owners.

Consequently, the trend of car sharing and car rentals is increasing.

Per a report by Frost & Sullivan, the number of members using car-sharing services is expected to rise from roughly 7 million members (112,000 vehicles) in 2015 to almost 36 million members (427,000 vehicles) by 2025. A major portion of the number will be concentrated in the United States.

Car sharing companies like Avis Budget Group, Inc.’s (CAR - Free Report) are expanding their fleet to attract customers. With a Zacks Rank of 3 (Hold), the company has crossed the 100,000 connected cars mark and the number reflects more than two-fold year-over-year increase. Further, Hertz Global Holdings, Inc.’s (HTZ - Free Report) delivered impressive performance in the U.S. Rental Car segment on the back of efficient fleet management, which raises optimism.Hertz carries a Zacks Rank #3 as well.

America – Second Largest Auto Manufacturer

The United States has one of the largest automotive markets in the world and is home to many global vehicles as well as auto parts manufacturers. Currently, it is the second largest manufacturer in the world by volume (motor vehicle production), the first being China.

Per a report by AAPC, the United States will sell more than 17 million vehicles per year through 2022 with auto production to exceed 12 million vehicles per year through 2018.

Stocks to Buy Based on Strong Prospects

Considering the emerging prospects in the auto industry, we think it will be prudent for investors to consider a few stocks from this space. The goal is to focus on stocks with solid fundamentals as well as stellar earnings and revenue growth.

To save investors’ time, we have taken the help of the Zacks Stock Screener to identify the best performing auto stocks.

We have selected stocks that have a VGM Score of A or B and are carrying a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Our research shows that stocks with Style Scores of A or B, when combined with a Zacks Rank #1 or 2, offer the best investment opportunities. Under the Zack Style Score system, V stands for Value, G for Growth and M for Momentum. The VGM Score is simply a weighted combination of these parameters and is a comprehensive tool that allows investors to filter through the standard scoring system and pick the winning stocks.

Allison Transmission Holdings, Inc. (ALSN - Free Report) : Allison Transmission sports a Zacks Rank #1. It is the largest manufacturer of fully-automatic transmissions for medium- and heavy-duty commercial vehicles.

The stock has a long-term expected earnings growth rate of 10%. Allison’s shares have rallied 40.2% in a year’s time, against the industry’s decline of 8%.

The Zacks Consensus Estimate for 2018 earnings is pegged at $4.43, reflecting a rise of 66.5% year over year. The same for revenues is pinned at $2.66 billion, showing an increase of 17.5% year over year.

Suzuki Motor Corporation (SZKMY - Free Report) : The company manufactures and markets motorcycles, automobiles as well as power and marine products in the global forum.  The stock has a Zacks Rank #2.

Suzuki Motor’s shares havereturned 11.5% in a year’s time, against the industry’s decline of 4.5%.

The Zacks Consensus Estimate for 2018 earnings is pegged at $18.83, showing a rise of 10.7% year over year. The same for revenues is pegged at $36.87 billion, reflecting an improvement of 8.6% year over year.

Honda Motor Co., Ltd. (HMC - Free Report) : The company is a leading manufacturer of automobiles and the largest producer of motorcycles in the world. Honda Motorsports a Zacks Rank #1.

The stock has a long-term expected earnings growth rate of 3%. Honda Motor’s shares have increased2.7% in a year’s time, against the industry’s decline of 4.5%.

The Zacks Consensus Estimate for 2018 earnings is pegged at $3.55, which has moved up 3.8% in the past 60 days. The same for revenues is pegged at $145.04 billion, reflecting a rise of 5% year over year.

The Paradox

Apart from strong business trends in 2018, the global automotive industry is expected to benefit from solid prospects in almost every region it operates in the upcoming years. With car sharing and electric vehicles driving growth, strong prospects in emerging economies bode well.

However, the automotive industry is an arena for aggressive rivalry and faces cutthroat competition for human resources, funding as well as technology. Considering the ongoing trend of car sharing and car rentals, the big car manufacturers’ profits are falling in the process. Further, stringent environmental regulations are a constant dampener for the space. In spite of the above-mentioned tailwinds, the global automotive industry is likely to be plagued by these issues in 2018.

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