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Will Cost Woes Mar Prospects of Auto Equipment Industry?
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The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering and suspension and brakes.
Let’s take a look at the industry’s three major themes:
Demand for original equipment depends directly on the sale of vehicles, which, in turn is heavily reliant on economic growth and consumer confidence. The U.S. economy is heading into 2020 with optimism after a series of interest rate cuts, favorable employment data and temporary trade truce with China. While improving economic outlook of the United States bodes well for the industry, many emerging economies snagged in the slowdown, which remains a concern. Emerging economies such as Brazil, India and China as well as newer markets of Asia, the Middle East and Africa hold significant opportunities for original equipment manufacturers (OEMs).The OEMs need to adapt to changing demand and supply pattern with respect to production in individual regions. Also, they have to develop their supply chain and product portfolio per the requirement of markets.
The rapidly globalizing world is opening up newer avenues for the industry.Widespread usage of technology and rapid digitalization is resulting in fundamental restructuring of the automotive market. A shift toward electric and self-driving vehicles has made it necessary for industry players to reorient their business model. This has resulted in new opportunities for auto-equipment manufacturers who need to adapt to the changing dynamics through systematic research and development.
With the technology shift in full swing, OEMs have to develop components that comply with emission standards and meet the critical requirements of electric and self-driving vehicles. These new features, upgrades and component designs require abundant capital, time and labor.From a future competitive standpoint, the equipment manufacturing companies have to focus on technology that offers the best value in a short span of time to market.
Zacks Industry Rank Shows Tepid Prospects
The Zacks Automotive - Original Equipment industry is a 43-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #149, which places it in the bottom 41% of approximately 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 weak 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Over the past year, the industry’s earnings estimate for the current year has moved down 21.2%.
Despite the industry’s bleak near-term view, we will present a few auto original equipment stocks that one can consider. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has topped the broader Auto sector as well as the Zacks S&P 500 composite. The industry has surged 30.4% over this period compared with the sector and S&P 500’s growth of 18.2% and 28.2%, respectively.
One-Year 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 6.41X compared with the S&P 500’s 11.73X and the sector’s trailing12-month EV/EBITDA of 8.75X.
Over the past five years, the industry has traded as high as 8.81X, as low as 4.65X and at a median of 6.65X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Evolving technologies and rising demand for electrified and autonomous vehicles offer new opportunities to industry participants. However, the industry’s success depends on how well the players manage escalating costs incurred for mass manufacturing and evolving technology.
OEMs have to take into account emission standards, specifically for vehicles sold in countries, which have strict emission regulations. Also, the companies have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. All these challenges require increased R&D spending to design innovative products as well as to set up production lines to manufacture these products. In the near term, auto equipment manufacturers have to balance their revenue generation with broader challenges and escalating expenses.
Westport Fuel Systems Inc. (WPRT - Free Report) : Canada-based Westport is a developer, manufacturer and supplier of advanced alternative fuel systems and components. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 1,100% in 2020.
Price and Consensus: WPRT
Veoneer, Inc. : Headquartered in Sweden, Veoneer manufactures automotive safety products. It offers radar systems, brakes, driver monitoring equipment, restraint controls and driver assist software. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 23.6% in 2020.
Price and Consensus: VNE
BorgWarner Inc. (BWA - Free Report) : Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 5.3% in 2020.
Price and Consensus: BWA
Autoliv, Inc. (ALV - Free Report) : Stockholm-based Autoliv develops, manufactures and markets a wide range of automotive safety systems, which majorly include passive safety systems. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 17.4% in 2020.
Price and Consensus: ALV
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Image: Bigstock
Will Cost Woes Mar Prospects of Auto Equipment Industry?
The Zacks Automotive - Original Equipment industry includes companies that engage in the designing, manufacture and distribution of automotive equipment components used for manufacturing vehicles. A few of the components manufactured by the participants include drive axle, engine, gearbox parts, steering and suspension and brakes.
Let’s take a look at the industry’s three major themes:
Zacks Industry Rank Shows Tepid Prospects
The Zacks Automotive - Original Equipment industry is a 43-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #149, which places it in the bottom 41% of approximately 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 weak 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Over the past year, the industry’s earnings estimate for the current year has moved down 21.2%.
Despite the industry’s bleak near-term view, we will present a few auto original equipment stocks that one can consider. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Outperforms Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has topped the broader Auto sector as well as the Zacks S&P 500 composite. The industry has surged 30.4% over this period compared with the sector and S&P 500’s growth of 18.2% and 28.2%, respectively.
One-Year 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 6.41X compared with the S&P 500’s 11.73X and the sector’s trailing12-month EV/EBITDA of 8.75X.
Over the past five years, the industry has traded as high as 8.81X, as low as 4.65X and at a median of 6.65X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Bottom Line
Evolving technologies and rising demand for electrified and autonomous vehicles offer new opportunities to industry participants. However, the industry’s success depends on how well the players manage escalating costs incurred for mass manufacturing and evolving technology.
OEMs have to take into account emission standards, specifically for vehicles sold in countries, which have strict emission regulations. Also, the companies have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. All these challenges require increased R&D spending to design innovative products as well as to set up production lines to manufacture these products. In the near term, auto equipment manufacturers have to balance their revenue generation with broader challenges and escalating expenses.
Below we present two stocks with a Zacks Rank #2 (Buy) that are well positioned to gain. Also, there are two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Westport Fuel Systems Inc. (WPRT - Free Report) : Canada-based Westport is a developer, manufacturer and supplier of advanced alternative fuel systems and components. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 1,100% in 2020.
Price and Consensus: WPRT
Veoneer, Inc. : Headquartered in Sweden, Veoneer manufactures automotive safety products. It offers radar systems, brakes, driver monitoring equipment, restraint controls and driver assist software. The company carries a Zacks Rank #2 and has an expected earnings growth rate of 23.6% in 2020.
Price and Consensus: VNE
BorgWarner Inc. (BWA - Free Report) : Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 5.3% in 2020.
Price and Consensus: BWA
Autoliv, Inc. (ALV - Free Report) : Stockholm-based Autoliv develops, manufactures and markets a wide range of automotive safety systems, which majorly include passive safety systems. The company carries a Zacks Rank #3 and has an expected earnings growth rate of 17.4% in 2020.
Price and Consensus: ALV
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>