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4 Foreign Auto Stocks to Buy Despite Global Chip Shortage
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Vehicle sales in major global markets including China, Japan and Europe are gathering momentum, courtesy of increasing shift toward private transportation, gradual economic recovery from coronavirus lows, rising demand for electric vehicles (EVs) and favorable government policies. Amid the tailwinds, prospects of the Zacks Automotive – Foreign industry seem sanguine.
On a negative note, the industry is currently reeling under semiconductor shortfall, which is likely to cause temporary hiccups. However, despite the chip deficit, a few industry participants including Toyota Motor (TM - Free Report) , Daimler AG , Honda Motor (HMC - Free Report) and Mazda Motor (MZDAY - Free Report) appear lucrative bets.
About 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.
Key Investing Trends
China Auto Market Sparks Optimism:While vehicle sales in China — the world’s largest auto market — slipped 2% year over year for 2020, the same rose for the ninth consecutive month in December. China is spearheading the global auto industry's recovery from coronavirus blues. Auto sales for the first two months of 2021 also witnessed robust year-over-year gains. Retail sales of passenger cars rose 25.7% in January and quadrupled in February compared with a year ago, per the China Passenger Car Association. Encouragingly, China Association of Automobile Manufacturers envisions vehicle sales to grow 4% year over year to 26.3 million units in 2021, thanks to improvement in consumer confidence, favorable government policies and lucrative discounts.
Europe & Japan on Recovery Path but Uncertainty Remains:While 2020 marked the sharpest fall in European auto sales, thanks to the coronavirus pandemic, the European Automobile Manufacturers’ Association expects 2021 vehicle sales to rise 10% year over year. While coronavirus woes are expected to affect the auto market in first-quarter 2021, sales are likely to pick pace from the second half of the ongoing year amid vaccination drive and preference toward personal mobility. Similarly for Japan, while new car sales declined 11.5% year over year for 2020, auto sales are expected to grow this year on rising vehicle demand and vaccination progress.
Widespread EV Adoption a Major Booster: The EV market is a goldmine of opportunities for automakers. Stricter emission and fuel-economy targets, ramp up of charging infrastructure and supportive government policies 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.
Chip Famine a Worry: A major issue posing a near-term threat to the global auto industry is the shortage in the supply of semiconductors. Various auto biggies across the globe are battling chip deficit, which is hindering their business operations and forcing them to idle production lines. Japan auto giants like Honda and Nissan are forced to slash production targets for the January-March quarter. Auto bigwigs like Stellantis, Volkswagen, General Motors and many others are suspending production/extending downtimes, as well as furloughing workers amid the chip crisis.
Zacks Industry Rank Signals Upbeat Prospects
The Zacks Automotive – Foreign industry is a 22-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #71, which places it in the top 28% 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 2021 have moved up 12.8%.
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 underperformed the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has witnessed growth of 31.5% compared with the S&P 500 and sector’s rise of 41.8% and 96.5%, 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.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 8.95X compared with the S&P 500’s 17.01X and the sector’s 17.69X.
Over the past five years, the industry has traded as high as 9.97X, as low as 5.32X and at a median of 6.67X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks That Hold Promise
Toyota: Japan’s auto giant Toyota was the world’s top-selling carmaker in 2020. The expanding portfolio of product lines and a robust lineup of trucks and sport utility vehicles offer ample growth visibility.To capitalize on the accelerated global shift to electric cars, the auto giant is deepening focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness.Notably, this Zacks Rank #1 (Strong Buy) firm aims to generate 40% of global sales from electric vehicles by 2025 and 70% by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 2.3% and 18.3%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: TM
Honda: Headquartered in Japan, Honda is one of the leading manufacturers of automobiles and the largest producer of motorcycles in the world. The company’s restructuring efforts to control costs and optimize production capacity are praiseworthy. Honda has been undertaking frequent collaborations with firms including GAC Group, General Motors, and Hitachi to expand business as well as bolster prospects.Honda’s 2030 Vision, which emphasizes on electrified mobility products to achieve a zero-carbon society, augurs well. This Zacks Rank #1 company aims to generate 66% of global automobile sales from EVs by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 21.7% and 28%, respectively.
Price & Consensus: HMC
Daimler:Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans, as well as buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The company’s investment plan of more than 70 billion euros ($85 billion) from 2021 through 2025 underscores its efforts to rev up electrification and digitization game targeted at achieving the desired level of profitability. The stock currently carries a Zacks Rank #2 (Buy). The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 164.3% and 14.5%, respectively.
Price & Consensus: DDAIF
Mazda: Japan-based Mazda engages in the manufacture and sale of passenger cars, commercial vehicles, along with automotive parts. Mazda is leveling up the EV game and plans to launch its first mass-production, all-electric car in Australia this year. The 2021 Mazda MX-30 will have both all-electric and mild-hybrid variants. The firm’s strategic alliance with Toyota bodes well. Last year, the firms increased their investment in a joint venture Alabama factory to $2.3 billion, $830 million more than announced in their original plan in 2018. Production of 150,000 Mazda crossovers per annum is targeted from the factory. The stock currently carries a Zacks Rank #2. The consensus estimate for earnings for the January-March quarter suggests year-over-year growth of 257.4%. Over the past seven days, earnings estimates for the current quarter have moved 15 cents north.
Price & Consensus: MZDAY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Image: Bigstock
4 Foreign Auto Stocks to Buy Despite Global Chip Shortage
Vehicle sales in major global markets including China, Japan and Europe are gathering momentum, courtesy of increasing shift toward private transportation, gradual economic recovery from coronavirus lows, rising demand for electric vehicles (EVs) and favorable government policies. Amid the tailwinds, prospects of the Zacks Automotive – Foreign industry seem sanguine.
On a negative note, the industry is currently reeling under semiconductor shortfall, which is likely to cause temporary hiccups. However, despite the chip deficit, a few industry participants including Toyota Motor (TM - Free Report) , Daimler AG , Honda Motor (HMC - Free Report) and Mazda Motor (MZDAY - Free Report) appear lucrative bets.
About 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.
Key Investing Trends
China Auto Market Sparks Optimism: While vehicle sales in China — the world’s largest auto market — slipped 2% year over year for 2020, the same rose for the ninth consecutive month in December. China is spearheading the global auto industry's recovery from coronavirus blues. Auto sales for the first two months of 2021 also witnessed robust year-over-year gains. Retail sales of passenger cars rose 25.7% in January and quadrupled in February compared with a year ago, per the China Passenger Car Association. Encouragingly, China Association of Automobile Manufacturers envisions vehicle sales to grow 4% year over year to 26.3 million units in 2021, thanks to improvement in consumer confidence, favorable government policies and lucrative discounts.
Europe & Japan on Recovery Path but Uncertainty Remains: While 2020 marked the sharpest fall in European auto sales, thanks to the coronavirus pandemic, the European Automobile Manufacturers’ Association expects 2021 vehicle sales to rise 10% year over year. While coronavirus woes are expected to affect the auto market in first-quarter 2021, sales are likely to pick pace from the second half of the ongoing year amid vaccination drive and preference toward personal mobility. Similarly for Japan, while new car sales declined 11.5% year over year for 2020, auto sales are expected to grow this year on rising vehicle demand and vaccination progress.
Widespread EV Adoption a Major Booster: The EV market is a goldmine of opportunities for automakers. Stricter emission and fuel-economy targets, ramp up of charging infrastructure and supportive government policies 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.
Chip Famine a Worry: A major issue posing a near-term threat to the global auto industry is the shortage in the supply of semiconductors. Various auto biggies across the globe are battling chip deficit, which is hindering their business operations and forcing them to idle production lines. Japan auto giants like Honda and Nissan are forced to slash production targets for the January-March quarter. Auto bigwigs like Stellantis, Volkswagen, General Motors and many others are suspending production/extending downtimes, as well as furloughing workers amid the chip crisis.
Zacks Industry Rank Signals Upbeat Prospects
The Zacks Automotive – Foreign industry is a 22-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #71, which places it in the top 28% 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 2021 have moved up 12.8%.
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 underperformed the Auto, Tires and Truck sector and Zacks S&P 500 composite over the past year. The industry has witnessed growth of 31.5% compared with the S&P 500 and sector’s rise of 41.8% and 96.5%, 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.
On the basis of trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 8.95X compared with the S&P 500’s 17.01X and the sector’s 17.69X.
Over the past five years, the industry has traded as high as 9.97X, as low as 5.32X and at a median of 6.67X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
4 Stocks That Hold Promise
Toyota: Japan’s auto giant Toyota was the world’s top-selling carmaker in 2020. The expanding portfolio of product lines and a robust lineup of trucks and sport utility vehicles offer ample growth visibility.To capitalize on the accelerated global shift to electric cars, the auto giant is deepening focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness.Notably, this Zacks Rank #1 (Strong Buy) firm aims to generate 40% of global sales from electric vehicles by 2025 and 70% by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 2.3% and 18.3%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: TM
Honda: Headquartered in Japan, Honda is one of the leading manufacturers of automobiles and the largest producer of motorcycles in the world. The company’s restructuring efforts to control costs and optimize production capacity are praiseworthy. Honda has been undertaking frequent collaborations with firms including GAC Group, General Motors, and Hitachi to expand business as well as bolster prospects.Honda’s 2030 Vision, which emphasizes on electrified mobility products to achieve a zero-carbon society, augurs well. This Zacks Rank #1 company aims to generate 66% of global automobile sales from EVs by 2030. The Zacks Consensus Estimate for fiscal 2021 and 2022 earnings implies a year-over-year increase of 21.7% and 28%, respectively.
Price & Consensus: HMC
Daimler:Germany-based Daimler develops and sells a wide range of automotive products such as passenger cars, trucks, vans, as well as buses. The Mercedes-Benz maker is focused on trimming costs and restructuring its model offerings, which bode well for long-term growth. The company’s investment plan of more than 70 billion euros ($85 billion) from 2021 through 2025 underscores its efforts to rev up electrification and digitization game targeted at achieving the desired level of profitability. The stock currently carries a Zacks Rank #2 (Buy). The consensus estimate for 2021 earnings and sales indicates year-over-year growth of 164.3% and 14.5%, respectively.
Price & Consensus: DDAIF
Mazda: Japan-based Mazda engages in the manufacture and sale of passenger cars, commercial vehicles, along with automotive parts. Mazda is leveling up the EV game and plans to launch its first mass-production, all-electric car in Australia this year. The 2021 Mazda MX-30 will have both all-electric and mild-hybrid variants. The firm’s strategic alliance with Toyota bodes well. Last year, the firms increased their investment in a joint venture Alabama factory to $2.3 billion, $830 million more than announced in their original plan in 2018. Production of 150,000 Mazda crossovers per annum is targeted from the factory. The stock currently carries a Zacks Rank #2. The consensus estimate for earnings for the January-March quarter suggests year-over-year growth of 257.4%. Over the past seven days, earnings estimates for the current quarter have moved 15 cents north.
Price & Consensus: MZDAY
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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