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Domestic Auto Industry Outlook: Smooth Ride in the Near Term

Sanjoy De

The Zacks Domestic Auto industry includes companies that are engaged in the designing, manufacturing and retailing of vehicles across the globe. The vehicles include passenger cars, crossover vehicles, sport utility vehicles (SUVs), trucks, vans, motorcycles and electric vehicles (“EVs”). The industry, which provides employment to a large number of people, is also at the forefront of innovation, courtesy of its nature as well as the transformation that is going through. Several companies have engine and transmission plants and conduct research and development (R&D) and testing.

The industry includes prominent names such as General Motors Company (GM) and Ford Motor Company (F), alongside electric vehicles (“EV”) pioneer Tesla, Inc. (TSLA) and motor cycle maker Harley-Davidson, Inc. (HOG).

Let’s take a look at the industry’s three major themes:

•    The auto sector is undergoing a paradigm shift. There has been a steep decline in demand for sedans and hatchbacks while demand for crossovers, SUVs and pick-up trucks has skyrocketed. This shift in preference has prompted automakers to alter their production strategies in favor of spacious and more comfortable vehicles.

•    The auto industry has witnessed a discernible rise in mobility and ride hailing services. As the future of the industry is extremely uncertain, automakers are going all out to enhance capabilities and opting for acquisitions.

•    The problem of safety still haunts automakers. In recent times, there have been a large number of recalls. This has not only marred automakers’ image but also put lives under threat.

Zacks Industry Rank Indicates Solid Prospects

The Zacks Domestic Auto industry is a seven-stock group within the broader Zacks Auto sector. The industry currently carries a Zacks Industry Rank #38, which places it in the top 15% 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 strong 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Over the past year, the industry’s earnings estimate for the current year has gone up by 3.7%.

Before we present a few domestic auto stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector but Lags S&P 500

The Domestic Auto industry has outperformed its own sector over the past year but underperformed the Zacks S&P 500 composite over the same time frame.

Over this period, the industry has declined 4% compared with the sector’s decline of 17.2%. The Zacks S&P 500 composite has gained 6.5% in the same time frame.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing auto stocks, the industry is currently trading at 12.9X compared with the S&P 500’s 10.8X. It is above the sector’s trailing-12-month EV/EBITDA of 8.8X.

Over the past five years, the industry has traded as high as 16.2X, as low as 6.4X and at a median of 10.4X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

 
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Bottom Line

The near-term prospects of the domestic auto industry appear to be encouraging on factors such as a strong economy, bright employment prospects and declining trade-related uncertainties. The new-found demand for SUVs and crossovers in place of passenger cars and sedans is also driving growth for domestic auto companies.

Notwithstanding the near-term tailwinds, automakers’ journey on uncertain mobility and autonomous track continues. However, the perennial problem of recalls will remain an overhang.

Some top-ranked stocks in the Zacks Domestic Auto space are General Motors, Fox Factory Holding Corp. (FOXF) and PACCAR Inc. (PCAR), each of which carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

General Motors: The Zacks Consensus Estimate for current-year earnings of this Detroit, MI-based company has remained unchanged over the past 30 days.

Price and Consensus: GM
 

Fox Factory Holding: The Zacks Consensus Estimate for current-year earnings of this Braselton, GA-based company has moved 2.9% north over the past 30 days.

Price and Consensus: FOXF

PACCAR: The Zacks Consensus Estimate for current-year earnings of this Bellevue, WA-based company has remained unchanged over the past 30 days.


Price and Consensus: PCAR

 
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Tesla, Inc. (TSLA) : Free Stock Analysis Report
 
PACCAR Inc. (PCAR) : Free Stock Analysis Report
 
Harley-Davidson, Inc. (HOG) : Free Stock Analysis Report
 
General Motors Company (GM) : Free Stock Analysis Report
 
Fox Factory Holding Corp. (FOXF) : Free Stock Analysis Report
 
Ford Motor Company (F) : Free Stock Analysis Report
 
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