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4 Stocks to Capitalize on Promising Foreign Auto Industry
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With the auto market in China finally out of the woods on the back of favourable government policies and gradual economic recovery, things are looking up for the Zacks Automotive – Foreign industry. While vehicle sales in Europe and Japan have taken a hit amid coronavirus woes, China is spearheading global auto market recovery.
Meanwhile, the electric vehicle (EV) market is growing prolifically, with advanced technology being leveraged more than ever before. Rising sales of green vehicles and widespread EV launches, along with concerted efforts by firms to level up their e-mobility game are likely to aid industry participants including Daimler AG , BMW AG (BAMXF - Free Report) , Fiat Chrysler Automobiles N.V. and Renault SA (RNLSY - Free Report) .
A Brief on the Industry
Companies in the Zacks Automotive – Foreign industry are involved in designing, engineering, manufacturing, distributing, and selling vehicles, components as well as production systems. Some of these companies are also engaged in research and development of electric and autonomous vehicles, fuel efficiency, along with low-emission technology.
What’s Shaping the Foreign Auto Industry?
China Auto Market Rises From Ashes: With effective control of the pandemic, China is now at the forefront of global auto market recovery. Importantly, auto sales in the world’s largest car market witnessed year-over-year growth for the sixth straight month in September.Supportive policies by the local government, improvement in consumer confidence and the overall country’s economy are aiding sales. China’s GDP expanded 4.9% in third-quarter 2020, increasing from 3.2% growth in the second quarter. China’s economic recovery is expected to get a boost in the upcoming quarters. Encouragingly, China Association of Automobile Manufacturers expects vehicles sales to maintain the growth momentum in the upcoming months as well.
Japan & Europe Auto Sales Hit the Brakes: Contrarily, markets in Europe and Japan are not appearing as sanguine as China. Auto sales in Japan slid more than 22% in the fiscal first half of 2020 as the coronavirus pandemic kept a lid on consumer confidence, underscoring the country’s fragile economic recovery. Consumer spending is expected to stagger in the coming months, with auto market slump in Japan likely to persist. Meanwhile, the auto industry in Europe is fighting tough CO2 rules and consumers are worrying about a second wave of infection and economic recession. Carmakers in Europe are having a tough time and automotive experts are voicing concerns that the struggling car industry of Europe is not likely to regain lost ground anytime soon.
EV Market Shines Bright: Widespread usage of technology and rapid digitization are resulting in fundamental restructuring of the automotive market. The EV segment is a goldmine of opportunities for automakers. Stricter emissions and fuel-economy targets are boosting sales of green vehicles. Adapting to the changing dynamics of the industry, automakers are taking the EV revolution seriously and are investing large sums of money in the development of e-mobility technologies, with the number of EV model launches rising rapidly. While China is the biggest and fastest growing EV market, developed nations including the United Kingdom, Germany and Japan are also actively encouraging the use of green vehicles to lower carbon emissions.
Zacks Industry Rank Signals Upbeat Prospects
The Zacks Automotive – Foreign industry is a 23-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #66, which places it in the top 26% 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 strong 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Over the past three months, the industry’s earnings estimates for 2020 have moved up 11.4%.
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 Zacks S&P 500 composite over the past year. The industry has witnessed a decline of 2.8% against the S&P 500 and sector’s rise of 11.4% and 45.6%, 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 trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 9.14X compared with the S&P 500’s 14.81X and the sector’s 16.2X.
Over the past five years, the industry has traded as high as 9.32X, as low as 5.32X and at a median of 6.65X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Foreign Auto Stocks to Fetch Solid Returns
BMW: Based in Germany, BMW is a multi-brand auto manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. The luxury automaker is fast stepping up electrification efforts and seeking to expand the EV lineup, which is expected to boost long-term prospects. The Zacks Rank #1 (Strong Buy) company targets to roll out 25 electric/hybrid vehicles by 2023. Key upcoming models include iX3, i4, iNext and i5. Shares of BMW have risen 14.6% over the past six months. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 65% and 8%, respectively.You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: BAMXF
Fiat Chrysler: Headquartered in the United Kingdom,Fiat manufactures and markets automobiles and commercial vehicles. The firm’s balance sheet strength and upbeat free cash flow guidance for second-half 2020 boost optimism. Importantly, Fiat is on track to achieve expected cost savings of €2 billion for full-year 2020. The Zacks Rank #1 company will be investing 9 billion euros to introduce electrification across its brand portfolio through 2022. Fiat’s impending merger with PSA Group is also set to bolster its long-term prospects. Shares of Fiat surged 42.6% over the past six months.The Zacks Consensus Estimate for fiscal 2021 earnings and sales suggests year-over-year growth of 290.6% and 8.7%, respectively.
Price and Consensus: FCAU
Daimler:Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans, and buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The fixed cost reductions will be achieved by terminating jobs, while much of the development-cost reductions will be achieved by phasing out combustion engines. The Zacks Rank #2 (Buy) company targets the electrified portfolio’s share to be 50% of global sales by 2030, with declining investments in combustion engines. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 137.6% and 7.6%, respectively.
Price and Consensus: DDAIF
Renault: France-based Renault designs and markets passenger cars and light commercial vehicles, while offering financing and service solutions for new and used vehicles. As a member of the world's largest car-making alliance, Renault, along with Nissan and Mitsubishi Motors, is undertaking several initiatives to concentrate more on efficiency and competitiveness than on volumes. The Zacks Rank #2 firm has shifted to manufacturing all electric cars in China after exiting from a joint venture with Dongfeng Motor Group Co. Renault believes that light commercial and electric vehicles are the two main drivers for clean mobility, and will help it maximize synergies with Nissan. The Zacks Consensus Estimate for fiscal 2021 earnings and sales points to year-over-year growth of 107.7% and 8.4%, respectively.
Price and Consensus: RNLSY
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by referendums and legislation, this industry is expected to blast from an already robust $17.7 billion in 2019 to a staggering $73.6 billion by 2027. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
4 Stocks to Capitalize on Promising Foreign Auto Industry
With the auto market in China finally out of the woods on the back of favourable government policies and gradual economic recovery, things are looking up for the Zacks Automotive – Foreign industry. While vehicle sales in Europe and Japan have taken a hit amid coronavirus woes, China is spearheading global auto market recovery.
Meanwhile, the electric vehicle (EV) market is growing prolifically, with advanced technology being leveraged more than ever before. Rising sales of green vehicles and widespread EV launches, along with concerted efforts by firms to level up their e-mobility game are likely to aid industry participants including Daimler AG , BMW AG (BAMXF - Free Report) , Fiat Chrysler Automobiles N.V. and Renault SA (RNLSY - Free Report) .
A Brief on the Industry
Companies in the Zacks Automotive – Foreign industry are involved in designing, engineering, manufacturing, distributing, and selling vehicles, components as well as production systems. Some of these companies are also engaged in research and development of electric and autonomous vehicles, fuel efficiency, along with low-emission technology.
What’s Shaping the Foreign Auto Industry?
China Auto Market Rises From Ashes: With effective control of the pandemic, China is now at the forefront of global auto market recovery. Importantly, auto sales in the world’s largest car market witnessed year-over-year growth for the sixth straight month in September.Supportive policies by the local government, improvement in consumer confidence and the overall country’s economy are aiding sales. China’s GDP expanded 4.9% in third-quarter 2020, increasing from 3.2% growth in the second quarter. China’s economic recovery is expected to get a boost in the upcoming quarters. Encouragingly, China Association of Automobile Manufacturers expects vehicles sales to maintain the growth momentum in the upcoming months as well.
Japan & Europe Auto Sales Hit the Brakes: Contrarily, markets in Europe and Japan are not appearing as sanguine as China. Auto sales in Japan slid more than 22% in the fiscal first half of 2020 as the coronavirus pandemic kept a lid on consumer confidence, underscoring the country’s fragile economic recovery. Consumer spending is expected to stagger in the coming months, with auto market slump in Japan likely to persist. Meanwhile, the auto industry in Europe is fighting tough CO2 rules and consumers are worrying about a second wave of infection and economic recession. Carmakers in Europe are having a tough time and automotive experts are voicing concerns that the struggling car industry of Europe is not likely to regain lost ground anytime soon.
EV Market Shines Bright: Widespread usage of technology and rapid digitization are resulting in fundamental restructuring of the automotive market. The EV segment is a goldmine of opportunities for automakers. Stricter emissions and fuel-economy targets are boosting sales of green vehicles. Adapting to the changing dynamics of the industry, automakers are taking the EV revolution seriously and are investing large sums of money in the development of e-mobility technologies, with the number of EV model launches rising rapidly. While China is the biggest and fastest growing EV market, developed nations including the United Kingdom, Germany and Japan are also actively encouraging the use of green vehicles to lower carbon emissions.
Zacks Industry Rank Signals Upbeat Prospects
The Zacks Automotive – Foreign industry is a 23-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #66, which places it in the top 26% 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 strong 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 positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. Over the past three months, the industry’s earnings estimates for 2020 have moved up 11.4%.
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 Zacks S&P 500 composite over the past year. The industry has witnessed a decline of 2.8% against the S&P 500 and sector’s rise of 11.4% and 45.6%, 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 trailing 12-month enterprise value-to EBITDA (EV/EBITDA), the industry is currently trading at 9.14X compared with the S&P 500’s 14.81X and the sector’s 16.2X.
Over the past five years, the industry has traded as high as 9.32X, as low as 5.32X and at a median of 6.65X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Foreign Auto Stocks to Fetch Solid Returns
BMW: Based in Germany, BMW is a multi-brand auto manufacturer that focuses on the premium segments of the worldwide automobile and motorcycle markets. The luxury automaker is fast stepping up electrification efforts and seeking to expand the EV lineup, which is expected to boost long-term prospects. The Zacks Rank #1 (Strong Buy) company targets to roll out 25 electric/hybrid vehicles by 2023. Key upcoming models include iX3, i4, iNext and i5. Shares of BMW have risen 14.6% over the past six months. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 65% and 8%, respectively.You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: BAMXF
Fiat Chrysler: Headquartered in the United Kingdom,Fiat manufactures and markets automobiles and commercial vehicles. The firm’s balance sheet strength and upbeat free cash flow guidance for second-half 2020 boost optimism. Importantly, Fiat is on track to achieve expected cost savings of €2 billion for full-year 2020. The Zacks Rank #1 company will be investing 9 billion euros to introduce electrification across its brand portfolio through 2022. Fiat’s impending merger with PSA Group is also set to bolster its long-term prospects. Shares of Fiat surged 42.6% over the past six months.The Zacks Consensus Estimate for fiscal 2021 earnings and sales suggests year-over-year growth of 290.6% and 8.7%, respectively.
Price and Consensus: FCAU
Daimler:Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans, and buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The fixed cost reductions will be achieved by terminating jobs, while much of the development-cost reductions will be achieved by phasing out combustion engines. The Zacks Rank #2 (Buy) company targets the electrified portfolio’s share to be 50% of global sales by 2030, with declining investments in combustion engines. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 137.6% and 7.6%, respectively.
Price and Consensus: DDAIF
Renault: France-based Renault designs and markets passenger cars and light commercial vehicles, while offering financing and service solutions for new and used vehicles. As a member of the world's largest car-making alliance, Renault, along with Nissan and Mitsubishi Motors, is undertaking several initiatives to concentrate more on efficiency and competitiveness than on volumes. The Zacks Rank #2 firm has shifted to manufacturing all electric cars in China after exiting from a joint venture with Dongfeng Motor Group Co. Renault believes that light commercial and electric vehicles are the two main drivers for clean mobility, and will help it maximize synergies with Nissan. The Zacks Consensus Estimate for fiscal 2021 earnings and sales points to year-over-year growth of 107.7% and 8.4%, respectively.
Price and Consensus: RNLSY
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by referendums and legislation, this industry is expected to blast from an already robust $17.7 billion in 2019 to a staggering $73.6 billion by 2027. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot stocks we're targeting >>