We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Shift Into High Gear With These 2 Domestic Auto Stocks
Read MoreHide Full Article
The near-term prospects of the Zacks Domestic Auto industry will be shaped by various factors. Vehicle sales are expected to grow this year, albeit at a slower rate compared to 2023 amid inflationary pressure, high borrowing costs and economic uncertainty. While increased labor expenses stemming from the recent UAW agreement will play a deterrent, the effects of it would be largely offset by declining input costs. Normalization of supply chains has boosted inventory levels but margins are under pressure due to heightened consumer discounts.
Although electric vehicle (EV) sales are expected to increase this year, it will require more effort from companies to drive sales due to a slower-than-expected pace of adoption, underscoring the need for the industry to navigate evolving consumer preferences and market dynamics. Two industry participants — General Motors (GM - Free Report) and Blue Bird Corporation (BLBD - Free Report) — are well-positioned to drive gains to your portfolio.
Industry Overview
The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and 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. The widespread usage of technology and rapid digitization are resulting in a fundamental restructuring of the automotive market. Several companies in the industry have engine and transmission plants and conduct research and development, and testing of electric and autonomous vehicles.
Key Factors at Play
Vehicle Sales Growth to Decelerate: New vehicle sales in the United States rose 5.1% in the first quarter of 2024 backed by strong inventory, incentives and healthy fleet volumes. The seasonally adjusted annual rate in the first quarter came in at 15.4 million, implying a year-over-year uptick of 2.7%. While vehicle sales are projected to grow in 2024, inflationary pressure, high costs of borrowing and an uncertain macro environment are expected to influence purchase decisions and slow down the pace of growth rate relative to 2023.
Manufacturing Costs Dynamics: The UAW agreement reached in 2023 is set to raise labor costs for all automakers as the firms aim to stay competitive in attracting and retaining talent. General Motors and Ford anticipate a roughly $9 billion increase in costs over the four-year agreement period. However, excluding labor, most input costs for automakers have declined since the pandemic peak, including steel, rubber, plastics, and glass. Just that the double-digit wage hikes in the UAW contract will weigh on total costs in 2024, offsetting some of the savings from input costs deflation.
Ample Inventory Aiding Sales but Ailing Margins: Post-pandemic supply chain disruptions have significantly eased, leading to a notable recovery in new vehicle inventory. According to estimates from J.D. Power and GlobalData, inventory levels reached approximately 1.7 million vehicles in March, marking a 4.2% increase from February and a 39% surge from March 2023. This surplus inventory has prompted increased incentives and discounts for consumers, thereby addressing affordability concerns. However, these discounts are impacting the average selling price of vehicles, thereby squeezing the profit margins of firms.
E-Mobility Landscape: EV sales growth in the United States is decelerating due to a slower-than-anticipated pace of customer acceptance. In the first quarter of 2024, Americans purchased 268,909 new EVs, constituting 7.3% of total new vehicle sales, a decline from the fourth quarter of 2023. Nonetheless, Cox Automotive projects a year-over-year increase in EV sales for 2024, aiming for roughly 10% market share by year-end. To achieve this, the EV market anticipates an influx of new models, incentives, discounts, and advertising. However, dealers will need to exert more effort to bolster sales in the face of evolving consumer preferences.
Zacks Industry Rank Holds Promise
The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential.
Before we present you two top-ranked stocks from the industry, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Domestic Auto industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The industry has lost around 6% against the S&P 500’s rally of 26.5%. The sector has risen 4.3% over the said time frame.
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. On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 19.08X compared with the S&P 500’s 14.4X and the sector’s 13.83X. Over the past five years, the industry has traded as high as 61.04X, as low as 9.69X and at a median of 23.02X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Add to Your Portfolio
Blue Bird: A prominent manufacturer of school buses and related parts, the company is a leader in alternative power. It offers alternative fuel applications and produces propane-powered and compressed natural gas-powered school buses. With a robust market demand and an order backlog of approximately 5,900 units valued at around $850 million, Blue Bird is experiencing notable growth. Initiatives like product enhancements for EVs, new safety features, complexity reduction, and quality improvements are contributing to its success. Manageable debt and sufficient liquidity add to its strengths.
Significant improvements in pricing, EV mix and parts sales resulted in record results for the first half of fiscal year 2024, prompting Blue Bird to raise its forecasts for the year. It expects fiscal 2024 revenues in the band of $1.27-$1.32 billion, up from $1.15-$1.25 billion guided earlier, as well as $1.13 billion recorded in fiscal 2023. Adjusted EBITDA is now envisioned to be between $145 million and $165 million, higher than the prior projection of $120-$140 million and $88 million generated in fiscal 2023.
BLBD currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Blue Bird’s fiscal 2024 and 2025 EPS implies year-over-year growth of 140% and 2%, respectively. The consensus mark has moved north by 46 cents and 41 cents, respectively, over the past seven days. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 92.4%.
General Motors: One of the world’s largest automakers, General Motors held the largest share of the U.S. auto market at 16.2% in 2023.Its compelling EV and ICE portfolio, with strong demand for its quality pickups and full-size SUVs, bodes well for delivery growth. The company’s hot-selling brands in America— namely Chevrolet, Buick, GMC and Cadillac— are boosting the top line. General Motors is swiftly advancing in its electrification journey, bolstered by a remarkable 300% surge in battery module production over the last six months. General Motors’ superior liquidity profile (total automotive liquidity of $33.3 billion as of Mar 31, 2024) and investor-friendly moves also instill confidence.
Driven by GMNA's market strength, cost-reduction efforts and focus on improving EV business sales and profitability, the company has lifted 2024 forecasts. GM now expects adjusted EBIT in the range of $12.5-$14.5 billion, up from $12-$14 billion guided earlier. Adjusted EPS is anticipated in the range of $9-$10, up from $8.50-$9.50, guided earlier. Adjusted automotive free cash flow is expected in the band of $8.5-$10.5 billion, higher than the prior forecast of $8-$10 billion.
GM currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for General Motors’ 2024 sales and earnings implies year-over-year growth of 1.7% and 22.4%, respectively. The consensus mark for GM’s 2024 and 2025 EPS has moved north by 32 cents and 29 cents, respectively, over the past 30 days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 18%.
Price & Consensus: GM
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Shift Into High Gear With These 2 Domestic Auto Stocks
The near-term prospects of the Zacks Domestic Auto industry will be shaped by various factors. Vehicle sales are expected to grow this year, albeit at a slower rate compared to 2023 amid inflationary pressure, high borrowing costs and economic uncertainty. While increased labor expenses stemming from the recent UAW agreement will play a deterrent, the effects of it would be largely offset by declining input costs. Normalization of supply chains has boosted inventory levels but margins are under pressure due to heightened consumer discounts.
Although electric vehicle (EV) sales are expected to increase this year, it will require more effort from companies to drive sales due to a slower-than-expected pace of adoption, underscoring the need for the industry to navigate evolving consumer preferences and market dynamics. Two industry participants — General Motors (GM - Free Report) and Blue Bird Corporation (BLBD - Free Report) — are well-positioned to drive gains to your portfolio.
Industry Overview
The Zacks Domestic Auto industry includes companies that are engaged in designing, manufacturing and retailing vehicles across the globe. These include passenger cars, crossover vehicles, sport utility vehicles, trucks, vans, motorcycles and electric vehicles. The industry — which is highly consumer cyclic and 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. The widespread usage of technology and rapid digitization are resulting in a fundamental restructuring of the automotive market. Several companies in the industry have engine and transmission plants and conduct research and development, and testing of electric and autonomous vehicles.
Key Factors at Play
Vehicle Sales Growth to Decelerate: New vehicle sales in the United States rose 5.1% in the first quarter of 2024 backed by strong inventory, incentives and healthy fleet volumes. The seasonally adjusted annual rate in the first quarter came in at 15.4 million, implying a year-over-year uptick of 2.7%. While vehicle sales are projected to grow in 2024, inflationary pressure, high costs of borrowing and an uncertain macro environment are expected to influence purchase decisions and slow down the pace of growth rate relative to 2023.
Manufacturing Costs Dynamics: The UAW agreement reached in 2023 is set to raise labor costs for all automakers as the firms aim to stay competitive in attracting and retaining talent. General Motors and Ford anticipate a roughly $9 billion increase in costs over the four-year agreement period. However, excluding labor, most input costs for automakers have declined since the pandemic peak, including steel, rubber, plastics, and glass. Just that the double-digit wage hikes in the UAW contract will weigh on total costs in 2024, offsetting some of the savings from input costs deflation.
Ample Inventory Aiding Sales but Ailing Margins: Post-pandemic supply chain disruptions have significantly eased, leading to a notable recovery in new vehicle inventory. According to estimates from J.D. Power and GlobalData, inventory levels reached approximately 1.7 million vehicles in March, marking a 4.2% increase from February and a 39% surge from March 2023. This surplus inventory has prompted increased incentives and discounts for consumers, thereby addressing affordability concerns. However, these discounts are impacting the average selling price of vehicles, thereby squeezing the profit margins of firms.
E-Mobility Landscape: EV sales growth in the United States is decelerating due to a slower-than-anticipated pace of customer acceptance. In the first quarter of 2024, Americans purchased 268,909 new EVs, constituting 7.3% of total new vehicle sales, a decline from the fourth quarter of 2023. Nonetheless, Cox Automotive projects a year-over-year increase in EV sales for 2024, aiming for roughly 10% market share by year-end. To achieve this, the EV market anticipates an influx of new models, incentives, discounts, and advertising. However, dealers will need to exert more effort to bolster sales in the face of evolving consumer preferences.
Zacks Industry Rank Holds Promise
The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #80, which places it in the top 32% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential.
Before we present you two top-ranked stocks from the industry, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Domestic Auto industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The industry has lost around 6% against the S&P 500’s rally of 26.5%. The sector has risen 4.3% over the said time frame.
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. On the basis of the trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 19.08X compared with the S&P 500’s 14.4X and the sector’s 13.83X. Over the past five years, the industry has traded as high as 61.04X, as low as 9.69X and at a median of 23.02X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Add to Your Portfolio
Blue Bird: A prominent manufacturer of school buses and related parts, the company is a leader in alternative power. It offers alternative fuel applications and produces propane-powered and compressed natural gas-powered school buses. With a robust market demand and an order backlog of approximately 5,900 units valued at around $850 million, Blue Bird is experiencing notable growth. Initiatives like product enhancements for EVs, new safety features, complexity reduction, and quality improvements are contributing to its success. Manageable debt and sufficient liquidity add to its strengths.
Significant improvements in pricing, EV mix and parts sales resulted in record results for the first half of fiscal year 2024, prompting Blue Bird to raise its forecasts for the year. It expects fiscal 2024 revenues in the band of $1.27-$1.32 billion, up from $1.15-$1.25 billion guided earlier, as well as $1.13 billion recorded in fiscal 2023. Adjusted EBITDA is now envisioned to be between $145 million and $165 million, higher than the prior projection of $120-$140 million and $88 million generated in fiscal 2023.
BLBD currently carries a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for Blue Bird’s fiscal 2024 and 2025 EPS implies year-over-year growth of 140% and 2%, respectively. The consensus mark has moved north by 46 cents and 41 cents, respectively, over the past seven days. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 92.4%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: BLBD
General Motors: One of the world’s largest automakers, General Motors held the largest share of the U.S. auto market at 16.2% in 2023.Its compelling EV and ICE portfolio, with strong demand for its quality pickups and full-size SUVs, bodes well for delivery growth. The company’s hot-selling brands in America— namely Chevrolet, Buick, GMC and Cadillac— are boosting the top line. General Motors is swiftly advancing in its electrification journey, bolstered by a remarkable 300% surge in battery module production over the last six months. General Motors’ superior liquidity profile (total automotive liquidity of $33.3 billion as of Mar 31, 2024) and investor-friendly moves also instill confidence.
Driven by GMNA's market strength, cost-reduction efforts and focus on improving EV business sales and profitability, the company has lifted 2024 forecasts. GM now expects adjusted EBIT in the range of $12.5-$14.5 billion, up from $12-$14 billion guided earlier. Adjusted EPS is anticipated in the range of $9-$10, up from $8.50-$9.50, guided earlier. Adjusted automotive free cash flow is expected in the band of $8.5-$10.5 billion, higher than the prior forecast of $8-$10 billion.
GM currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for General Motors’ 2024 sales and earnings implies year-over-year growth of 1.7% and 22.4%, respectively. The consensus mark for GM’s 2024 and 2025 EPS has moved north by 32 cents and 29 cents, respectively, over the past 30 days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 18%.
Price & Consensus: GM