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Foreign Auto Industry Moves Into Fast Lane: 2 Promising Stocks
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The outlook for Zacks Automotive – Foreign industry is bright amid sustained demand for vehicles and worldwide push for green energy transitions despite economic uncertainty in various key markets. Vehicle sales in Europe are set to increase, albeit at a slower pace. China car sales (including gas-powered, electric and hybrids) are also projected to rise. India’s impressive growth momentum is expected to continue its upward trajectory. The industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Key industry players like Toyota (TM - Free Report) and Volkswagen (VWAGY - Free Report) offer appealing investment opportunities.
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in a fundamental restructuring of the market. Stricter emission and fuel-economy targets and ramp-up of charging infrastructure, as well as supportive government policies, are boosting sales of green vehicles. With almost all firms intensifying their electrification game, competition is getting tougher with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency, along with low-emission technologies.
Key Investing Themes
Registrations in EU to Record Modest Growth: In December 2023, new car registrations in the European Union (EU) declined 3.3% year over year, snapping 16 straight months of growth. For full-year 2023, registrations rose 13.9%, reaching 10.5 million units. While the pace of sales growth is expected to moderate this year, it will, nonetheless, continue its upward trajectory. In January and February 2024, the registrations increased by 12.1% and 10.1%, respectively. Per the European Automobile Manufacturers’ Association, new car registrations are likely to inch up 2.5% this year. It also anticipates the share of battery-powered electric vehicles to increase to about 20%, buoyed by new model launches and expanding charging infrastructure.
China Auto Sales to Rise Despite Sluggish Economy: In 2023, China's vehicle sales rose 12% year on year to reach 30.1 million units, per the China Association of Automobile Manufacturers. Although China’s economy is currently struggling amid a debt pile and declining property investment, S&P Mobility forecasts a 4.2% increase in vehicle demand this year. The country is advancing its EV targets and automakers are revving up innovation and product development. Per Oilprice.com, EV sales in China are likely to total 11.5 million units in 2024, accounting for 44% share of all new vehicle sales. Rystad Energy forecasts the share of new energy vehicle sales (comprising battery-powered and hybrids) to increase from 19.2% in 2023 to 21.8% in 2024.
Car Sales in India to Continue Momentum: In 2023, India maintained its position as the world's third-largest automotive market, staying ahead of Japan for the second consecutive year. India's passenger vehicle market achieved a significant milestone in 2023 by surpassing 4 million units for the first time. The country’s growing population, economic growth, fiscal stimulus provided by the government, rising motorization and rollout of new models are expected to drive sales to 4.9 million units this year. SUVs continue to dominate India’s automotive market, driving substantial sales volumes. In 2023, SUV sales surged 24% year over year, hitting the 2 million mark and constituting over 50% of the nation's passenger vehicle sales. According to GlobalData, this trend is set to continue, with SUV sales projected to reach 2.2 million units in 2024, marking a further 9% year-over-year increase.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #59, which places it in the top 23% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates decent 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 optimistic about this group’s earnings growth potential. Year to date, the industry’s earnings estimates for 2024 have moved 12.5% north.
Before we present a couple of stocks that investors can buy, given their solid potential, let’s look at the industry’s recent stock market performance and current valuation.
Industry Tops Sector and S&P 500
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has rallied 52.5% compared with the sector and the S&P 500’s growth of 9.2% and 27.7%, 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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 13.19X compared with the S&P 500’s 15.17X and the sector’s 15.54X.
Over the past five years, the industry has traded as high as 13.36X, as low as 5.65X and at a median of 9.02X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Grab Right Away
Toyota: It is one of the world’s leading automakers, with an array of brands, including Toyota, Lexus and Scion, which position it for solid growth. To capitalize on the accelerated global shift to environment-friendly vehicles, this Japan-based auto giant is deepening its focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness.
It also aims to generate 40% of its global sales from EVs by 2025 and 70% by 2030. It aims to expand global sales of BEVs to 1.5 million units in 2026. Upbeat projections for profit and revenues for fiscal 2024 spark optimism. Revenues and operating income for the current fiscal are projected to be ¥43.5 trillion and ¥4.9 trillion, indicating a year-over-year surge of 18% and 79.8%, respectively. Toyota’s commitment to maximize shareholders value via dividends and buyback is also praiseworthy.
Toyota currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 10% and 73.6%, respectively. The earnings estimate for fiscal 2024 has been revised upward by 83 cents in the past 30 days.
Price & Consensus: TM
Volkswagen: Europe's largest car manufacturer, Volkswagen, saw a 12% increase in deliveries last year, totaling 9.24 million vehicles. Electrification has surged, with the share of BEV deliveries reaching a record 10% in the fourth quarter. The group delivered 771,100 BEVs in 2023, implying a 35% rise year over year. The ramp-up of new vehicles, cost-reduction efforts and expansion initiatives are aiding the company. The upcoming five-year plan (2025-2029) will see EUR 170 billion investment primarily in new products, regional strengthening, battery business, and hybridized combustion engines.
Key upgrades in 2024 include hybrid versions of bestsellers like Golf and Passat, alongside new all-electric models such as Porsche Macan Electric and Audi Q6 e-tron01. A total of 30 new product launches are planned for this year, underscoring the firm’s commitment to innovation and market leadership.
VWAGY currently sports a Zacks Rank #1 and has a Value Score of A. The consensus mark for 2024 sales and earnings implies year-over-year growth of 2% and 0.1%, respectively. The Zacks Consensus Estimate for 2024 EPS has been upwardly revised by 11 cents over the past 30 days.
Image: Bigstock
Foreign Auto Industry Moves Into Fast Lane: 2 Promising Stocks
The outlook for Zacks Automotive – Foreign industry is bright amid sustained demand for vehicles and worldwide push for green energy transitions despite economic uncertainty in various key markets. Vehicle sales in Europe are set to increase, albeit at a slower pace. China car sales (including gas-powered, electric and hybrids) are also projected to rise. India’s impressive growth momentum is expected to continue its upward trajectory. The industry's valuation provides support, as it trades at a discount compared to the S&P 500 and the broader automotive sector. Key industry players like Toyota (TM - Free Report) and Volkswagen (VWAGY - Free Report) offer appealing investment opportunities.
Industry Overview
Companies in the Zacks Automotive – Foreign industry are involved in designing, manufacturing and selling vehicles, components as well as production systems. The foreign automotive industry is highly dependent on business cycles and economic conditions. China, Japan, Germany and India are some of the key foreign automotive manufacturing countries. The widespread usage of technology is resulting in a fundamental restructuring of the market. Stricter emission and fuel-economy targets and ramp-up of charging infrastructure, as well as supportive government policies, are boosting sales of green vehicles. With almost all firms intensifying their electrification game, competition is getting tougher with each passing day. Foreign automakers are now actively engaged in the R&D of electric and autonomous vehicles, fuel efficiency, along with low-emission technologies.
Key Investing Themes
Registrations in EU to Record Modest Growth: In December 2023, new car registrations in the European Union (EU) declined 3.3% year over year, snapping 16 straight months of growth. For full-year 2023, registrations rose 13.9%, reaching 10.5 million units. While the pace of sales growth is expected to moderate this year, it will, nonetheless, continue its upward trajectory. In January and February 2024, the registrations increased by 12.1% and 10.1%, respectively. Per the European Automobile Manufacturers’ Association, new car registrations are likely to inch up 2.5% this year. It also anticipates the share of battery-powered electric vehicles to increase to about 20%, buoyed by new model launches and expanding charging infrastructure.
China Auto Sales to Rise Despite Sluggish Economy: In 2023, China's vehicle sales rose 12% year on year to reach 30.1 million units, per the China Association of Automobile Manufacturers. Although China’s economy is currently struggling amid a debt pile and declining property investment, S&P Mobility forecasts a 4.2% increase in vehicle demand this year. The country is advancing its EV targets and automakers are revving up innovation and product development. Per Oilprice.com, EV sales in China are likely to total 11.5 million units in 2024, accounting for 44% share of all new vehicle sales. Rystad Energy forecasts the share of new energy vehicle sales (comprising battery-powered and hybrids) to increase from 19.2% in 2023 to 21.8% in 2024.
Car Sales in India to Continue Momentum: In 2023, India maintained its position as the world's third-largest automotive market, staying ahead of Japan for the second consecutive year. India's passenger vehicle market achieved a significant milestone in 2023 by surpassing 4 million units for the first time. The country’s growing population, economic growth, fiscal stimulus provided by the government, rising motorization and rollout of new models are expected to drive sales to 4.9 million units this year. SUVs continue to dominate India’s automotive market, driving substantial sales volumes. In 2023, SUV sales surged 24% year over year, hitting the 2 million mark and constituting over 50% of the nation's passenger vehicle sales. According to GlobalData, this trend is set to continue, with SUV sales projected to reach 2.2 million units in 2024, marking a further 9% year-over-year increase.
Zacks Industry Rank Indicates Rosy Prospects
The Zacks Automotive – Foreign industry within the broader Zacks Auto-Tires-Trucks sector currently carries a Zacks Industry Rank #59, which places it in the top 23% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates decent 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 optimistic about this group’s earnings growth potential. Year to date, the industry’s earnings estimates for 2024 have moved 12.5% north.
Before we present a couple of stocks that investors can buy, given their solid potential, let’s look at the industry’s recent stock market performance and current valuation.
Industry Tops Sector and S&P 500
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector and the Zacks S&P 500 composite over the past year. The industry has rallied 52.5% compared with the sector and the S&P 500’s growth of 9.2% and 27.7%, 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.
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), the industry is currently trading at 13.19X compared with the S&P 500’s 15.17X and the sector’s 15.54X.
Over the past five years, the industry has traded as high as 13.36X, as low as 5.65X and at a median of 9.02X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Grab Right Away
Toyota: It is one of the world’s leading automakers, with an array of brands, including Toyota, Lexus and Scion, which position it for solid growth. To capitalize on the accelerated global shift to environment-friendly vehicles, this Japan-based auto giant is deepening its focus on manufacturing electric and fuel-cell vehicles, which will bolster the company’s product competitiveness.
It also aims to generate 40% of its global sales from EVs by 2025 and 70% by 2030. It aims to expand global sales of BEVs to 1.5 million units in 2026. Upbeat projections for profit and revenues for fiscal 2024 spark optimism. Revenues and operating income for the current fiscal are projected to be ¥43.5 trillion and ¥4.9 trillion, indicating a year-over-year surge of 18% and 79.8%, respectively. Toyota’s commitment to maximize shareholders value via dividends and buyback is also praiseworthy.
Toyota currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The Zacks Consensus Estimate for TM’s fiscal 2024 sales and EPS implies year-over-year growth of 10% and 73.6%, respectively. The earnings estimate for fiscal 2024 has been revised upward by 83 cents in the past 30 days.
Price & Consensus: TM
Volkswagen: Europe's largest car manufacturer, Volkswagen, saw a 12% increase in deliveries last year, totaling 9.24 million vehicles. Electrification has surged, with the share of BEV deliveries reaching a record 10% in the fourth quarter. The group delivered 771,100 BEVs in 2023, implying a 35% rise year over year. The ramp-up of new vehicles, cost-reduction efforts and expansion initiatives are aiding the company. The upcoming five-year plan (2025-2029) will see EUR 170 billion investment primarily in new products, regional strengthening, battery business, and hybridized combustion engines.
Key upgrades in 2024 include hybrid versions of bestsellers like Golf and Passat, alongside new all-electric models such as Porsche Macan Electric and Audi Q6 e-tron01. A total of 30 new product launches are planned for this year, underscoring the firm’s commitment to innovation and market leadership.
VWAGY currently sports a Zacks Rank #1 and has a Value Score of A. The consensus mark for 2024 sales and earnings implies year-over-year growth of 2% and 0.1%, respectively. The Zacks Consensus Estimate for 2024 EPS has been upwardly revised by 11 cents over the past 30 days.
Price & Consensus: VWAGY
You can see the complete list of today’s Zacks #1 Rank stocks here.