Rising vehicle prices and robust demand for electric vehicles (EVs) are major catalysts for the Zacks Automotive – Foreign industry. Near-term sales prospects in Europe and Japan still look dubious, given an uncertain macro-environment and inflationary pressure, which may induce consumers to put off discretionary expenses. However, China auto sales are finally gathering momentum. A slew of favorable automotive policies in the world’s largest car market is set to fuel sales.
The fact that manufacturers are successfully managing to pass the rising costs of production to consumers by charging high prices for vehicles is acting as a tailwind. Despite the supply chain chaos and cost headwinds, the industry’s prospects still look good enough now to place your bets on BYD Co. BYDDY, BMW AG BAMXF and XPeng Inc. XPEV.
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.
4 Key Trends
Vehicle Sales in China Start Picking Pace: Vehicle sales in China — the world’s largest auto market —rose 25.7% year over year to 2.61 million units in September. This marked the fourth straight month of increase on the back of the relaxation of COVID-induced curbs as well as stimulus packages offered by the government to revive the market. In the first nine months of 2022, sales increased 4.4% to 19.47 million units. Vehicle sales in China are expected to sustain their momentum in the fourth quarter, courtesy of favorable policies from the central government and local authorities.China Association of Automobile Manufacturers anticipates 2022 vehicle sales to be higher than last year’s levels.
European Market Not Out of Woods Yet: The European Union (EU) market auto sales finally returned to growth in August, snapping 13 straight months of decline. The new passenger car registrations continued to witness year-over-year increase in September but that was majorly driven by extreme chip shortage in the year-ago month. Over the first nine months of 2022, the EU passenger car market contracted 9.9% to 6,784,090 units. While so far, the supply side of the market has remained constrained, the European Automobile Manufacturers’ Association (ACEA) now expects demand to take a hit going forward amid inflation and recessionary fears. Factoring in the headwinds, the agency now expects EU vehicle sales to edge down by 1% to 9.6 million units in 2022, withdrawing its earlier forecast of growth.
Japan Auto Market’s Uncertainty: While new vehicle sales in Japan witnessed year-over-year growth in September and October, total sales from January-October 2022 were down 7.4% year over year, per MarkLines Automotive Industry Portal. The near-term outlook for sales remains clouded, given inflation worries and an uncertain macro environment. Chip crisis and tight inventories are likely to keep the prices of cars elevated, which may further prompt consumers to put off discretionary expenses. Per Focus2Move, Japan’s auto sales are expected to decline 7.7% in 2022.
Soaring Popularity of Green Vehicles a Boon: Various cities and nations are pushing toward green energy amid heightening climate concerns. The European Commission is set to phase out new petrol and diesel cars by 2035. China intends to ban fossil fuel cars and sell only new energy vehicles by 2035. Japan will scrap the sale of gasoline-powered cars by the mid-2030s. California will ban the sale of new ICE cars effective 2035 and ensure that 100% of new car and truck sales are electric by 2035 and 2045, respectively. The acceleration of EV targets is offering opportunities to automakers. With consumers’ confidence in EVs rising fast, automakers are prioritizing their resources toward the sale of new energy vehicles, and sales of green vehicles are rocketing.
Zacks Industry Rank Signals Optimism
The Zacks Automotive – Foreign industry is a 27-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #96, which places it in the top 38% 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 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. Since September, average earnings estimates for 2022 have inched up nearly 3%.
Before we present a few stocks that investors can buy given their sturdy potential, let’s look at the industry’s recent stock market performance and current valuation.
Industry Lags S&P 500, Tops Sector
The Zacks Automotive – Foreign industry has outperformed the Auto, Tires and Truck sector but underperformed the Zacks S&P 500 composite over the past year. The industry has lost 39.1% compared with the S&P 500 and the sector’s decline of 20.4% and 42.6%, respectively.
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 7.04X compared with the S&P 500’s 11.28X and the sector’s 13X.
Over the past five years, the industry has traded as high as 10.59X, as low as 5.42X and at a median of 7.74X, as the chart below shows.
3 Promising Stocks
BYD: China-based BYD is principally engaged in the research, manufacture, and distribution of automobiles, secondary rechargeable batteries as well as mobile phone components. The company stands to benefit from robust demand for green vehicles and batteries in China. The firm’s rechargeable battery business provides lithium-ion and nickel batteries that are essential for the development of green vehicles. The rising deliveries of Han and Tang models are driving BYD’s top line. Solid execution capabilities and expansion efforts outside China, particularly in the European market, will further fuel the stock. The company’s revenues have been growing rapidly and unlike other pure EV players based in China, BYD has been making profits for years.
BYD currently sports a Zacks Rank #1 (Strong Buy). The Zacks Consensus Estimate for 2022 earnings has been upwardly revised by 15 cents over the past seven days to $1.46 per share. The consensus mark for 2022 earnings and sales implies year-over-year growth of 342.4% and 77%, respectively. You can see the complete list of today’s Zacks #1 Rank stocks here.
BMW AG: Germany-based BMW AG is one of the leading multi-brand automobile manufacturers that focuses on the premium segments of the worldwide automobile and motorcycle markets. BMW AG is taking great strides in electrification and expects EVs to account for 50% of its global sales by 2030. By 2025, the carmaker expects to sell more than two million all-electric vehicles. This year, BMW is putting as many as 15 EVs into production. The auto biggie has pledged to invest around €30 billion toward e-mobility by 2025 end. It intends to build five gigafactories for electric car batteries through partnerships, strategically positioned globally at places where the auto biggie manufactures its EVs.
BMW AG currently sports a Zacks Rank #1. The Zacks Consensus Estimate for 2022 earnings has been upwardly revised by 35 cents over the past 30 days to $24.49 per share. The consensus mark for 2022 earnings and sales implies year-over-year growth of 10.3% and 4%, respectively.
XPeng: This rising EV star of China is poised for speedy sales growth, thanks to the soaring popularity of the existing models, including G9, G3i and G3 SUVs as well as P7 and P5 sedans. In addition to vehicle sales, XPeng also generates revenues from after-sales services, and ride-hailing and supercharging services. We expect XPeng’s commitment to innovation and continuous R&D spending to bolster its standing in the market and fortify its EV game. With the mission of bringing Smart EVs to the China auto market through continuous innovation in core vehicle systems, driverless technology and smart connectivity, this company is set to become a name to reckon with in the coming years.
XPeng currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2022 loss has been narrowed by 6 cents over the past seven days. The consensus mark for 2022 and 2023 sales implies year-over-year growth of 47% and 92%, respectively.
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