2 Stock for off-road mobility of the domestic automobile industry
The historic UAW-Detroit 3 strike has dampened Zacks’ domestic auto industry’s future prospects somewhat. Although the UAW has ratified new contracts with Stellantis, Ford and General Motors after a nearly seven-week strike, the effects of the stoppage are likely to be felt in the near term. Aside from lost production and revenue amid the strike, higher interest rates may push consumers to refrain from purchasing expensive goods. While strong electric vehicle sales act as a tailwind, increased capital expenditures and associated R&D expenses may limit cash flows. However, industry players love Bakkar Picard W Kano The government stands tall amid broader challenges and is well placed to weather headwinds.
About the industry
The Zacks Local Auto industry includes companies that design, manufacture, and retail vehicles around the world. These include passenger cars, crossovers, sport utility vehicles, trucks, vans, motorcycles, and electric vehicles. The industry – which is largely consumer cyclical and provides employment to a large number of people – is at the forefront of innovation, thanks to its nature and the transformation it is undergoing. The widespread use of technology and rapid digitalization has led to a fundamental restructuring of the automotive market. Many companies in the industry have engine and transmission plants and conduct research, development, and testing of electric and autonomous vehicles.
Topics that affect the fate of the industry
Residual effects of the UAW strike: While the United Auto Workers (UAW) finally secured record deals with the Detroit 3 automakers — General Motors, Ford and Stellantis — after lengthy negotiations and a nearly seven-week work stoppage, the impact of this historic strike is about to be dramatically felt on Results and performance of companies in the near term. For example, GM expects production losses due to the strike to have a more pronounced impact in the fourth quarter, with an additional $600 million decline in earnings before interest and taxes. In its latest earnings call, Ford reported that it had made a production loss of about 80,000 units, which would reduce 2023 EBIT by $1.3 billion. Volatility caused by the strike prompted Ford and General Motors to withdraw their 2023 guidance.
Affordability concerns loom large: Although current high interest rates have not dampened consumer interest in vehicles, there is growing concern about affordability that may hinder future growth. Jonathan Smoak, chief economist at Cox Automotive, expects potential constraints on demand for new cars due to higher prices and the impact of higher interest rates. The rising cost of vehicle financing may prompt less affluent buyers to postpone their purchases, posing a risk of a slowdown in demand for vehicles that may impact industry players. Additionally, distribution inefficiencies, labor challenges, wage inflation, and global logistics issues are putting pressure on industry participants.
The rising popularity of electric cars is both a blessing and a curse: Concerns about climate change, technological advances, and stringent fuel emissions standards are increasing the reliance of automakers and customers on green vehicles. Legacy automakers are making extra efforts to gain a strong foothold in this hot field of e-mobility. They are introducing new models of electric cars as the demand for environmentally friendly cars continues to grow. It is worth noting that electric car sales exceeded 300,000 cars for the first time in the third quarter, an increase of nearly 50% year-on-year. Electric vehicles contributed 7.9% to total US auto sales in the third quarter, up from 6.1% a year ago and 7.2% in the second quarter. However, the significant R&D expenses associated with developing high-tech vehicles pose potential pressure on cash flows in the near term. Effective cost management becomes crucial to maintaining healthy profit margins in this dynamic landscape.
The Zacks Industry Rank indicates a dismal outlook
The Zacks Automotive – Domestic industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #154, which puts it in the bottom 39% of approximately 250 Zacks industries.
The group’s Zacks Industry Rank, which is essentially the average Zacks rating of all member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s placement in the bottom 50% of Zacks-ranked industries is a result of negative earnings outlooks for the constituent companies as a whole. Looking at the overall earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Industry earnings estimates for 2023 have fallen by 20% in the past three months.
Despite the industry’s tepid near-term prospects, we’ll introduce you to two industry participants worth paying attention to in your investment portfolio. Before that, let’s take a look at the industry’s stock market performance and current valuation.
Underdeveloped industrial sector and S&P 500
The domestic auto industry underperformed the Zacks S&P 500 Composite Index and sector last year. The industry is up 8.7% compared to the S&P 500 and the sector grew 14.8% and 13.2% respectively during the mentioned time frame.
One-year price performance
Current assessment of the industry
Since auto companies are heavily indebted, it makes sense to value them based on the EV/EBITDA (enterprise value/earnings before interest tax and amortization) ratio. On a trailing 12-month enterprise value to EBITDA (EV/EBITDA) basis, the industry currently trades at 17.15X compared to the S&P 500’s 13.07X and 13.56X for the sector. In the past five years, the industry traded as high as 58.62X, low as 8.78X and averaged as high as 18.79X, as the chart below shows.
EV/EBITDA Ratio (Past 5 Years)
2 stocks worth buying
Bakkar: This is one of the leading names in trucking, with popular brands like Kenworth, Peterbilt, and DAF. The DAF line-up, which includes the XF, XG and XD models, shows promise. The Kenworth T680E hydrogen fuel cell and battery-powered Peterbilt 579 demonstrate PACCAR’s commitment to providing zero-emission commercial vehicles. Accelerating efforts towards electrification, connected vehicle services and advanced driver assistance system options are set to boost the company’s prospects. For the PACCAR parts segment, an expanded network of parts distribution centers, dealer locations and independent TRP stores, along with managed dealer inventory and innovative e-commerce systems, assist potential customers. The company’s low leverage and investor-friendly moves instill confidence. PACCAR’s strong balance sheet is complemented by A+/A1 credit ratings assigned by Standard & Poor’s and Moody’s, respectively.
The Zacks Consensus Estimate for PCAR’s 2023 sales and earnings call for annual growth of 20% and 56%, respectively. The consensus mark for 2023 and 2024 earnings has moved north by 43 cents and 35 cents, respectively, in the past 30 days. PCAR currently carries a Zacks Rank of #2 (Buy) and has a VGM Score of A.
Price and consensus: PCAR
Kano: It is a mobility technology company that designs, engineers, develops, and manufactures electric vehicles, primarily delivery vehicles and pickup trucks, for the commercial and consumer markets in the United States. The company recently announced the milestone of delivering the first batch of electric vehicles manufactured in Oklahoma to the state. This marks the start of phased manufacturing for Canoo in Oklahoma, with lifestyle delivery vehicle models scheduled to ship to key customers and partners in 2023, followed by a ramp-up of production units in 2024. The company has entered the revenue generation phase, reporting its first-ever revenue Valued at $519,000 in the third quarter of 2023.
The Zacks Consensus Estimate for GOEV earnings for 2023 and 2024 indicates annual growth of 69% and 53%, respectively. The company has managed to deliver high earnings over the last four quarters, and the average surprise was 26%. PCAR currently carries a Zacks Rank of #2 and has a VGM Score of A.
Price and consensus: GOEV
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