The Zacks
Domestic Auto
industry is seemingly showing resiliency in the face of an uncertain economic outlook, rising interest rates and stubborn inflation. Buyers’ inclination toward green cars is serving as a key catalyst. The popularity of electric vehicles (EVs) is soaring with each passing day and auto biggies are fast cementing their position in this domain. While supply chain chaos is still there, production challenges are ebbing and inventory levels are visibly improving. Meanwhile, the most pressing concern now is high borrowing costs, which are making it difficult for less-affluent and subprime consumers to find affordable vehicle payments to suit their monthly budgets. Nonetheless, the overall prospects of the industry look decent. We recommend placing your bets on two top-ranked industry participants,
PACCAR
PCAR
and
Harley-Davidson
HOG
, to fetch handsome gains.
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 the 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 Investing Themes
Robust EV Sales
: Climate change concerns, technological advancement and stringent fuel-emission standards are increasing green vehicles’ adoption by both automakers as well as customers. The demand for electric cars is off the charts and EV sales continue to break records. The year 2022 has been the biggest year for zero-emission vehicles in the United States on record. In the third quarter of 2022, U.S. EV sales continued to outpace their ICE counterparts, hitting a new record of over 200,000 units of battery-powered vehicles.Legacy automakers are going the extra mile to gain a strong foothold in this red-hot e-mobility space. The latest Inflation Reduction Act will fuel EV sales further. The EV momentum is only expected to blossom going forward.
Inventory Levels Improving
: With challenges associated with new-vehicle production starting to abate, we are seeing noticeable improvements in the inventory levels. Strong production levels are likely to translate to higher days’ supply and offer shoppers more vehicle options, going forward. Total US automotive inventory increased to about 1.55 million units at the end of October, up from 1.43 million units in September and the highest level since May 2021. Rising inventory and pent-up consumer demand will aid sales.
Vehicle Affordability Is the New Concern
: Just when new vehicles seem to be becoming more widely available, it’s to be seen if Americans wish to continue to splurge on these high-ticket items in the face of rising interest rates. To purchase the same vehicle at the same monthly payment, buyers are now forced to increase their down payment, which is resulting in new affordability challenges. With borrowing getting expensive and risks of a potential slowdown in the economy, consumers might be unwilling to pay a heavy premium for cars.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Automotive – Domestic industry is a 20-stock group within the broader Zacks
Auto-Tires-Trucks
sector. The industry currently carries a Zacks Industry Rank #75, which places it in the top 30% 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 encouraging 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 gaining confidence in this group’s earnings growth potential.
Before we present you three industry participants worth considering for your portfolio, let’s take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500 & Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite and the sector over the past year. The industry has lost 53.1% compared with the S&P 500 and sector’s decline of 18.7% and 47.6%, respectively, over the said time frame.
One-Year Price Performance
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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 16.46X compared with the S&P 500’s 11.64X and the sector’s 12.21X. Over the past five years, the industry has traded as high as 54.42X, as low as 8.85X and at a median of 15.30X, as the chart below shows.
EV/EBITDA Ratio (Past Five Years)
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2 Stocks to Buy
PACCAR
: Headquartered in Bellevue, PACCAR is one of the leading names in the trucking business with reputed brands like Kenworth, Peterbilt and DAF. The new DAF lineup comprising XF and XG models (launched in 2021) and the XD model (launched in 2022) is driving the firm’s revenues. Continued growth in the aftermarket parts — which is a high margin and a less cyclic business, thanks to the rampant adoption of its proprietary MX engine — bodes well. Accelerated efforts toward electrification, connected vehicle services and advanced driver-assistance system options are set to bolster PACCAR’s prospects. A solid balance sheet with low leverage is another tailwind.
PACCAR currently sports a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The Zacks Consensus Estimate for PACCAR’s 2022 and 2023 earnings implies year-over-year growth of 53.4% and 4.3%, respectively. The consensus mark for PACCAR’s 2022 and 2023 sales implies year-over-year growth of 23.4% and 5%, respectively. Over the trailing four quarters, the stock surpassed estimates on all occasions, the average surprise being 12.6%.
You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Price and Consensus: PCAR
Harley-Davidson
: Milwaukee-based Harley-Davidson is one of the leading motorcycle makers in the world. In sync with long-term growth objectives to streamline its product portfolio, HOG is focusing on motorcycle models and technologies that better align with market trends. Its Hardwire plans look to improve effectiveness and contribute to revenue growth. Per the plan, the company remains focused on bolstering its market position by emphasizing on sportier bikes and a modern marketing strategy. Building on Hardwire strategy, the company announced Hardwire Stage II in May, aiming for increased performance.
Harley-Davidson currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for HOG’s 2022 and 2023 earnings implies year-over-year growth of 12.4% and 1%, respectively. The consensus mark for HOG’s 2022 and 2023 sales implies year-over-year growth of 7.5% and 3%, respectively. Over the trailing four quarters, the stock surpassed estimates on three occasions and missed once, the average surprise being 43.2%.
Price and Consensus: HOG
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