3 overseas auto stocks benefiting from bullish industry sentiment – Zacks Investment Research | CarTailz

Rising vehicle prices and robust demand for electric vehicles (EVs) are key catalysts for the Zacks Automotive – Foreign industry. The near-term selling prospects in Europe and Japan still look doubtful amid an uncertain macroeconomic environment and inflationary pressures that could prompt consumers to delay voluntary spending. However, auto sales in China are finally picking up speed. A series of favorable automotive policies in the world’s largest car market will boost sales.

The momentum is that manufacturers are able to pass on the rising production costs to consumers via high vehicle prices. Despite the supply chain chaos and cost headwinds, the industry’s prospects still look good enough to bet on BYD Co. (BYDDY free report) BMW AG (BAMXF Free report) and XPeng Inc. (XPEV free report).

Industry Overview

Companies in the Zacks Automotive – Foreign industry are involved in the development, manufacture and sale of vehicles, components and production systems. The foreign automotive industry is heavily dependent on the economy and the state of the economy. China, Japan, Germany and India are among the most important foreign car manufacturers. The widespread use of technology is leading to a fundamental restructuring of the market. Stricter emission and fuel saving targets and the expansion of the charging infrastructure as well as supporting government measures promote the sale of environmentally friendly vehicles. With almost all companies stepping up their electrification game, the competition is getting tougher by the day. Foreign automakers are now actively engaged in research and development of electric and autonomous vehicles, fuel efficiency and low-emission technologies.

4 key trends

Vehicle sales in China are slowly picking up speed: Vehicle sales in China — the world’s largest auto market — rose 25.7% year-on-year to 2.61 million units in September. This was the fourth straight month of gains on the back of the easing of COVID-related restrictions as well as government stimulus packages offered to revitalize the market. In the first nine months of 2022, sales increased by 4.4% to 19.47 million units. Vehicle sales in China are expected to maintain momentum in the fourth quarter thanks to the favorable policies of the central and local governments. The Chinese Automobile Manufacturers Association assumes that vehicle sales in 2022 will be above the level of the previous year.

The European market is not out of the woods yet: Auto sales in the European Union (EU) market finally returned to growth in August, posting 13 consecutive months of decline. New passenger car registrations continued to rise in September compared to the previous year, but this was mainly due to the extreme shortage of chips in the same month last year. In the first nine months of 2022, the passenger car market in the EU shrank by 9.9% to 6,784,090 units. While the supply side of the market has so far remained constrained, the Association of European Automobile Manufacturers (ACEA) now expects demand to slow going forward amid fears of inflation and recession. Taking the headwinds into account, the agency now expects EU vehicle sales to fall by 1% to 9.6 million units in 2022 and is withdrawing its previous growth forecast.

The uncertainty of the Japanese car market: While new vehicle sales in Japan increased year-on-year in September and October, overall sales from January to October 2022 fell 7.4% year-on-year, according to MarkLine’s Automotive Industry Portal. Short-term selling prospects remain clouded amid inflation concerns and an uncertain macroeconomic environment. Chip crisis and tight inventories are likely to keep auto prices high, which could further prompt consumers to defer voluntary spending. According to Focus2Move, Japan’s auto sales are expected to fall by 7.7% in 2022.

The increasing popularity of environmentally friendly vehicles is a blessing: Various cities and nations are pushing for green energy amid rising climate concerns. The European Commission plans to phase out new petrol and diesel cars by 2035. China aims to ban fossil fuel cars and only sell new energy vehicles by 2035. Japan will phase out sales of gasoline-powered cars by the mid-2030s. California will ban new internal combustion engine sales by 2035 and ensure 100% of new car and truck sales are electric by 2035 and 2045 respectively. Accelerating EV goals presents opportunities for automakers. As consumer confidence in electric vehicles grows rapidly, automakers are prioritizing their resources to sell new energy vehicles, and sales of green vehicles are skyrocketing.

Zacks Industry Rank signals optimism

Zacks Automotive – Foreign Industry is a 27-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently holds a Zacks Industry Rank #96, making 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 member stocks, indicates a decent near-term outlook. Our research shows that the top 50% of industries evaluated by Zacks outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of industries ranked by Zacks is a result of positive earnings prospects for each company overall. Looking at the revisions to aggregate earnings estimates, analysts appear optimistic about the earnings growth potential of this group. Since September, median earnings estimates for 2022 have risen nearly 3%.

Before we review some stocks that investors may want to buy given their solid potential, let’s take a look at recent stock market performance and the industry’s current valuation.

Industry lags S&P 500, top sector

The Zacks Automotive – Foreign Industry outperformed the auto, tire, and truck sectors over the past year but underperformed the Zacks S&P 500 Composite. The industry is down 39.1% compared to the S&P 500 and the sector’s 20.4% and 42.6% declines respectively.

One-year price development

Current rating of the industry

Because auto companies are highly indebted, it makes sense to value them using their 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 to 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 shown in the chart below.

EV/EBITDA ratio (last five years)

3 promising stocks

BYD: BYD, based in China, is mainly engaged in the research, manufacture and sale of automobiles, secondary batteries and mobile phone components. The company will benefit from robust demand for green vehicles and batteries in China. The company’s rechargeable battery business supplies lithium-ion and nickel batteries, which are essential for the development of environmentally friendly vehicles. Increasing shipments of Han and Tang models are driving BYD’s top line. Solid execution capabilities and expansion efforts outside of China, particularly in the European market, will continue to boost the stock. The company’s revenue has been growing rapidly, and unlike other China-based pure-play EV suppliers, BYD has been profitable for years.

BYD currently has a Zacks Rank #1 (Strong Buy). The Zacks Consensus estimate for 2022 earnings has been revised up 15 cents over the past seven days to $1.46 per share. The consensus mark for earnings and sales in 2022 implies year-over-year growth of 342.4% and 77%, respectively. You can see the full list of today’s Zacks #1 Rank stocks can be found here.

Price: BYDDY

BMW AG: Germany-based BMW AG is one of the leading multi-brand automobile manufacturers, focusing on the premium segments of the global automobile and motorcycle markets. BMW AG is making great strides in electrification and expects electric vehicles to account for 50% of its global sales by 2030. By 2025, the automaker expects to sell more than two million fully electric vehicles. This year, BMW will put up to 15 electric vehicles into production. The car company has committed to investing around 30 billion euros in e-mobility by the end of 2025. It intends to build five EV battery gigafactories through partnerships, strategically positioned in locations around the world where the auto biggie manufactures its EVs.

BMW AG currently has a Zacks Rank #1. The Zacks Consensus estimate for 2022 earnings has been revised up 35 cents over the past 30 days to $24.49 per share. The consensus mark for earnings and sales in 2022 implies year-over-year growth of 10.3% and 4%, respectively.

Price & Consensus: BAMXF

XPeng: This rising EV star from China is poised for rapid sales growth thanks to the rising popularity of existing models including the G9, G3i and G3 SUVs and the P7 and P5 sedans. In addition to vehicle sales, XPeng also generates revenue from after-sales services, ride-hailing and supercharging services. We expect XPeng’s commitment to innovation and continuous R&D spending will strengthen its position in the market and strengthen its EV game. With a mission to bring intelligent electric vehicles to the Chinese auto market through continuous innovation in core vehicle systems, driverless technology and intelligent connectivity, this company will become a name to be reckoned with in the years to come.

XPeng currently carries a Zacks Rank #2 (Buy). The Zacks Consensus estimate for loss in 2022 has been reduced by 6 cents in the past seven days. The consensus mark for sales in 2022 and 2023 implies year-on-year growth of 47% and 92%, respectively.

Price & Consensus: XPEV

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