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2 Domestic Auto Stocks Efficiently Weathering Industry Hurdles
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The highly cyclical Zacks Domestic Auto industry is grappling with economic uncertainty amid elevated interest rates that might delay big-ticket purchases. High inventory levels are leading to vehicle discounts, squeezing automakers' margins. Slower-than-expected adoption of electric vehicles (EVs) adds to the industry's challenges, and rising labor costs are only making matters worse. Despite this bleak outlook, two industry players — General Motors (GM - Free Report) and Blue Bird Corp (BLBD - Free Report) — are defying the odds and are well-positioned for strong performance.
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 Themes Influencing the Industry's Fate
Economic Uncertainty: July's weak jobs data, with lower-than-expected job additions and a rising unemployment rate, has raised concerns about the U.S. economy. High vehicle financing costs, despite an anticipated rate cut next month, are deterring big-ticket purchases, impacting the cyclic auto industry. July's new-vehicle sales fell 2% year over year and 3% month over month, with the seasonally adjusted annual rate dropping to 15.8 million, down 0.8% from last year. Cox Automotive predicts U.S. auto sales to slow down in the second half of 2024, ending the year at 15.7 million units, a modest 1.3% increase from 2023, amid inflationary pressures and an uncertain macroeconomic environment.
High Inventory Squeezing Margins: Per J.D. Power and GlobalData, inventory levels reached approximately 2.8 million vehicles at the end of the second quarter of 2024, marking a 55% increase from the year-ago period. The surplus inventory has prompted increased incentives and discounts for consumers. The average incentive per vehicle increased roughly 50% year over year in June. However, these discounts are impacting the average selling price of vehicles, thereby squeezing the profit margins of firms. As the average price of a new vehicle is expected to remain low in the near term, margins are likely to stay under pressure.
Scaled Back EV Plans: Despite advancements in technology and infrastructure, the adoption of electric vehicles has progressed more slowly than expected. Consumers continue to hesitate while choosing an EV amid high upfront costs, range anxiety and insufficient charging infrastructure. Many auto biggies like Ford and General Motors are nowscaling back their EV plans due to intense competition, lower demand, high manufacturing costs and pricing pressure.
Wage-Driven Cost Pressure: The United Automobile Workers (UAW) labor negotiations have led to wage increases of up to 60% for new hires, potentially impacting the entire auto industry, from production costs to profit margins. General Motors and Ford expect costs to rise approximately $9 billion over the four-year agreement. While most input costs for automakers have declined since the pandemic peak, the significant wage hikes in the UAW contract will put pressure on overall costs in 2024, partially offsetting the savings from lower input costs.
Zacks Industry Rank Paints a Dull Picture
The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #197, which places it in the bottom 21% 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 lackluster 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential.
Despite the tepid scenario, we will highlight two stocks from the industry that you can add to your watchlist. Before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500 But Tops Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite but nominally outperformed sector over the past year. The industry has lost around 16.5% against the S&P 500’s rally of 18.6%. The sector has declined 16.8% 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 25.11X compared with the S&P 500’s 17.21X and the sector’s 14.96X. Over the past five years, the industry has traded as high as 61.82X, as low as 9.93X and at a median of 24.13X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Consider
General Motors: It is the top-selling automaker in the United States, benefiting from strong demand for its quality pickups and SUVs, which are driving profit growth. The company is also optimistic about its EV business, with the Ultium Drive system and battery plants in Ohio, Tennessee and Lansing expected to enhance its e-mobility capabilities in the long term.Additionally, GM is on track to achieve its $2 billion net cost reduction program by the end of 2024 and has sufficient cash reserves to handle short-term challenges, with total automotive liquidity of $35.8 billion as of Jun 30, 2024.
The company reported better-than-expected results for the second quarter of 2024 and raised its full-year profit and FCF forecast. During the second quarter of 2024, GM bought back $1 billion of shares, and in June, it authorized an additional $6 billion for share buyback, indicating confidence in its financial stability and future performance.
General Motors currently has a Zacks Rank #2 (Buy) and a VGM Score of A. The Zacks Consensus Estimate for the company’s 2024 sales and earnings implies year-over-year growth of 4.2% and 29.4%, respectively. The consensus mark for GM’s 2024 and 2025 EPS has moved north by 7 cents and 9 cents, respectively, over the past seven days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 18.8%.
Blue Bird: This century-old school bus manufacturer has successfully expanded into new automotive technologies, including alternative fuels and EVs. The company is well-positioned to capitalize on the growing demand for electric school buses driven by favorable government policies. In addition to battery-electric buses, Blue Bird also offers gasoline and propane-powered options, with propane recognized by the EPA for its ultra-low emissions. The company's focus on enhancing operations, improving production efficiency, increasing new orders and strengthening its leadership in alternative-powered buses has yielded positive results.
In its latest quarterly report, Blue Bird exceeded expectations and raised its full-year profit and sales forecast. The company has been benefiting from robust market demand, with an order backlog of approximately 5,200 units, including nearly 560 electric buses. Initiatives like EV product enhancements, new safety features, complexity reduction and quality improvements are key contributors to its ongoing success.
BLBD currently has a Zacks Rank #3 (Hold) and a VGM Score of B. The Zacks Consensus Estimate for the company’s fiscal 2024 sales and earnings implies year-over-year growth of 18% and 167%, respectively. The consensus mark for Blue Bird’s 2024 and 2025 EPS has moved north by 13 cents and 21 cents, respectively, over the past seven days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 95.5%.
Price & Consensus: BLBD
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2 Domestic Auto Stocks Efficiently Weathering Industry Hurdles
The highly cyclical Zacks Domestic Auto industry is grappling with economic uncertainty amid elevated interest rates that might delay big-ticket purchases. High inventory levels are leading to vehicle discounts, squeezing automakers' margins. Slower-than-expected adoption of electric vehicles (EVs) adds to the industry's challenges, and rising labor costs are only making matters worse. Despite this bleak outlook, two industry players — General Motors (GM - Free Report) and Blue Bird Corp (BLBD - Free Report) — are defying the odds and are well-positioned for strong performance.
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 Themes Influencing the Industry's Fate
Economic Uncertainty: July's weak jobs data, with lower-than-expected job additions and a rising unemployment rate, has raised concerns about the U.S. economy. High vehicle financing costs, despite an anticipated rate cut next month, are deterring big-ticket purchases, impacting the cyclic auto industry. July's new-vehicle sales fell 2% year over year and 3% month over month, with the seasonally adjusted annual rate dropping to 15.8 million, down 0.8% from last year. Cox Automotive predicts U.S. auto sales to slow down in the second half of 2024, ending the year at 15.7 million units, a modest 1.3% increase from 2023, amid inflationary pressures and an uncertain macroeconomic environment.
High Inventory Squeezing Margins: Per J.D. Power and GlobalData, inventory levels reached approximately 2.8 million vehicles at the end of the second quarter of 2024, marking a 55% increase from the year-ago period. The surplus inventory has prompted increased incentives and discounts for consumers. The average incentive per vehicle increased roughly 50% year over year in June. However, these discounts are impacting the average selling price of vehicles, thereby squeezing the profit margins of firms. As the average price of a new vehicle is expected to remain low in the near term, margins are likely to stay under pressure.
Scaled Back EV Plans: Despite advancements in technology and infrastructure, the adoption of electric vehicles has progressed more slowly than expected. Consumers continue to hesitate while choosing an EV amid high upfront costs, range anxiety and insufficient charging infrastructure. Many auto biggies like Ford and General Motors are nowscaling back their EV plans due to intense competition, lower demand, high manufacturing costs and pricing pressure.
Wage-Driven Cost Pressure: The United Automobile Workers (UAW) labor negotiations have led to wage increases of up to 60% for new hires, potentially impacting the entire auto industry, from production costs to profit margins. General Motors and Ford expect costs to rise approximately $9 billion over the four-year agreement. While most input costs for automakers have declined since the pandemic peak, the significant wage hikes in the UAW contract will put pressure on overall costs in 2024, partially offsetting the savings from lower input costs.
Zacks Industry Rank Paints a Dull Picture
The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #197, which places it in the bottom 21% 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 lackluster 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential.
Despite the tepid scenario, we will highlight two stocks from the industry that you can add to your watchlist. Before that, let's take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500 But Tops Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite but nominally outperformed sector over the past year. The industry has lost around 16.5% against the S&P 500’s rally of 18.6%. The sector has declined 16.8% 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 25.11X compared with the S&P 500’s 17.21X and the sector’s 14.96X. Over the past five years, the industry has traded as high as 61.82X, as low as 9.93X and at a median of 24.13X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
2 Stocks to Consider
General Motors: It is the top-selling automaker in the United States, benefiting from strong demand for its quality pickups and SUVs, which are driving profit growth. The company is also optimistic about its EV business, with the Ultium Drive system and battery plants in Ohio, Tennessee and Lansing expected to enhance its e-mobility capabilities in the long term.Additionally, GM is on track to achieve its $2 billion net cost reduction program by the end of 2024 and has sufficient cash reserves to handle short-term challenges, with total automotive liquidity of $35.8 billion as of Jun 30, 2024.
The company reported better-than-expected results for the second quarter of 2024 and raised its full-year profit and FCF forecast. During the second quarter of 2024, GM bought back $1 billion of shares, and in June, it authorized an additional $6 billion for share buyback, indicating confidence in its financial stability and future performance.
General Motors currently has a Zacks Rank #2 (Buy) and a VGM Score of A. The Zacks Consensus Estimate for the company’s 2024 sales and earnings implies year-over-year growth of 4.2% and 29.4%, respectively. The consensus mark for GM’s 2024 and 2025 EPS has moved north by 7 cents and 9 cents, respectively, over the past seven days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 18.8%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: GM
Blue Bird: This century-old school bus manufacturer has successfully expanded into new automotive technologies, including alternative fuels and EVs. The company is well-positioned to capitalize on the growing demand for electric school buses driven by favorable government policies. In addition to battery-electric buses, Blue Bird also offers gasoline and propane-powered options, with propane recognized by the EPA for its ultra-low emissions. The company's focus on enhancing operations, improving production efficiency, increasing new orders and strengthening its leadership in alternative-powered buses has yielded positive results.
In its latest quarterly report, Blue Bird exceeded expectations and raised its full-year profit and sales forecast. The company has been benefiting from robust market demand, with an order backlog of approximately 5,200 units, including nearly 560 electric buses. Initiatives like EV product enhancements, new safety features, complexity reduction and quality improvements are key contributors to its ongoing success.
BLBD currently has a Zacks Rank #3 (Hold) and a VGM Score of B. The Zacks Consensus Estimate for the company’s fiscal 2024 sales and earnings implies year-over-year growth of 18% and 167%, respectively. The consensus mark for Blue Bird’s 2024 and 2025 EPS has moved north by 13 cents and 21 cents, respectively, over the past seven days. In the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 95.5%.
Price & Consensus: BLBD