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Coronavirus Rattles Auto Market: Should You Buy the Dip?

Rimmi Singhi

The automotive industry, which has been already grappling with various challenges including new-emission standards, rising costs amid technological shift and robust demand for ride-sharing services, is now getting further plagued by coronavirus woes. The deadly virus, which is fast spreading across countries, has dealt a particularly heavy blow on the global auto industry. Amid the concerns,Moody’s has cut its global vehicle sales forecast and now expects the metric to fall 2.5% in 2020 versus the prior estimate of 0.9% decline.

Coronavirus Sends a Jolt Across Auto Industry

Wuhan — identified as the epicenter of the epidemic — is touted as China’s motor city and is home to numerous auto plants including biggies like General Motors, Honda Motor, Nissan and Renault. As part of the nationwide shutdown, many automakers shut their factories, and production and sales have gone for a toss. The health epidemic has not only dented consumer sentiments and waned vehicles’ demand but also triggered supply chain issues globally.  Reportedly, U.S. auto giant General Motors airlifted supplies for North America truck production amid parts shortage. Italian-American automaker Fiat Chrysler has been seeking alternative suppliers. German auto giant Volkswagen suspended operations at all its plants in China that are operated in partnership with SAIC. February car sales have tanked severely in China this month. Car sales in the United States are also in the red territory as virus concerns loom over the industry.

The auto industry in Japan, which happens to constitute around 20% of the country’s GDP, has been severely impacted, with car launches and auto exhibitions getting cancelled in the wake of coronavirus outbreak. The country, which is already teetering on the brink of recession amid sales tax hike, has taken a further beating by virus fears. Reportedly, Tokyo Motor Cycle Show and Osaka Motorcycle Show 2020 have been aborted. Japan auto biggies Nissan and Honda are set to further halt the production of their plants in China, thereby extending supplying chain disruptions. Notably, Nissan plans to keep its plants in Hubei and Henan province shut indefinitely. Honda’s operations in Wuhan are anticipated to stay shuttered till Mar 11. Last week, Toyota warned that its operations in Japan are likely to get hit by supply-chain issues. According to industrial bodies, new vehicle sales in Japan declined 10.3% year over year in February 2020, marking the fifth consecutive monthly decline.

Wake Up Call for Automakers

Indeed, the deadly virus that broke out in China has left global automakers struggling to secure numerous parts required for building cars. Let’s delve deeper. China, the largest car market in the world, offers massive market opportunities and industrial scale. Most of the automakers across the world have allocated majority of their Asian investments in China. With that, overall vehicle sales in China skyrocketed from nearly 1 million units in 2001 to 24 million units in 2019. Over the years, American automakers have become increasingly dependent on the China market and kept withdrawing investments from other powerhouse Asian markets, including Japan, Vietnam, Indonesia, Thailand and India. With China seeming to be a profit machine like no other, auto suppliers such as BorgWarner, Lear, Magna and Aptiv, among others, raised investments in the country and built scores of factories.

However, the global auto industry met with an abrupt shock by a highly contagious virus, which resulted in the shutdown of factories, dealerships with less customer traffic and supply-chain disruption. As COVID-19 is set to roil manufacturing processes globally, it may cause millions or billions in lost production. Becoming excessively dependent on China has certainly taken a toll on the auto industry.

As the auto industry has been caught off guard this time, companies should start chalking out a proper contingency plan for any such catastrophic event in the future. Well, transition from China won’t be easy and is not needed either. Striking a balance and diversifying supply chains have become the need of the hour. While firms need to remain engaged with China, they should start diversifying to other high-potential markets that are likely to rack up growth during the next decade in order to reduce risks to the supply chain. Smart tech giants like Apple, Google and Microsoft have already announced plans to shift some production to Taiwan, Vietnam, and Thailand amid virus concerns.

Go Bargain-Shopping Amid Correction

The coronavirus outbreak appears to have stalled the stock market rally that notched spectacular gains last year. Major U.S. indices — the Dow Jones, S&P 500 and NASDAQ — witnessed sharp sell-offs lately. Rising incidences of Coronavirus outside mainland China have been sending jitters to investors. Shares of auto stocks are witnessing massive corrections. Over the past month, U.S. car giants General Motors GM and Ford F stocks have depreciated 12.8% and 16.1%, respectively. Other foreign auto biggies like Volkswagen VWAGY, Nissan NSANY and BMW AG have also recorded double-digit declines in the past month.

While it’s a serious concern, it certainly shouldn’t kill your investment appetite. In fact, it has created the opportune moment to buy certain stocks. A prudent move would be to buy the beaten-down stocks that are set to gain traction on the back of encouraging fundamentals and solid earnings prospects.

3 Beaten-Down Auto Stocks That Hold Promise

Below we have zeroed in on three stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy), having strong long-term EPS growth expectations. While all these stocks have declined in double digits over the past month, they possess strong fundamentals and are most likely to rebound and enrich your portfolio returns in the future. You can see the complete list of today’s Zacks #1 Rank stocks here.

Fox Factory Holding Corp FOXF: This maker of suspension and ride dynamics components for bikes, ATV's, motorcycles and other vehicles sports a Zacks Rank #1 and has a long term-expected EPS growth rate of 16.98%. Notably, the company — which surpassed estimates in each of the trailing four quarters — has been witnessing positive estimate revisions for both the current and next year.

Polaris Industries Inc. PII: The Minnesota-based motorcycles and off-road vehicles firm carries a Zacks Rank #2 and has a long term-expected EPS growth rate of 12%. The firm surpassed earnings estimates in each of the last four quarters, and has been seeing northbound estimate revisions for both the current and next year.

LCI Industries LCII: The recreational vehicle manufacturer sports a Zacks Rank #1 and has a long term-expected EPS growth rate of 12%. The company topped earnings estimates in each of the trailing four quarters, and has been witnessing upward estimate revisions for both the current and next year.

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Click to get this free report Ford Motor Company (F) : Free Stock Analysis Report Nissan Motor Co. (NSANY) : Free Stock Analysis Report General Motors Company (GM) : Free Stock Analysis Report Polaris Industries Inc. (PII) : Free Stock Analysis Report Fox Factory Holding Corp. (FOXF) : Free Stock Analysis Report LCI Industries (LCII) : Free Stock Analysis Report Volkswagen AG (VWAGY) : Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research