For Immediate Release
Chicago, IL – June 7, 2023 – Today, Zacks Equity Research discusses Ford F and General Motors GM.
Industry: U.S. Auto
Domestic automakers are enjoying robust recovery and growth as they overcome pandemic-related challenges and capitalize on favorable market trends. With improving inventory, incentives, and the surging popularity of EVs, the Zacks Domestic Auto Industry is well-positioned for a prosperous future. In this article, we delve into the key drivers that are propelling the U.S. auto industry to new heights and why you should not miss out on two top-ranked domestic auto stocks namely — Ford and General Motors — that are riding the wave of industry strength.
About the Industry
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 a 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
Improving Inventory Levels Supporting Pent-Up Demand: With the gradual alleviation of challenges associated with new vehicle production, inventory levels are experiencing significant improvements.According to estimates from J.D. Power and LMC Automotive, retail inventory was approximately 1.3 million vehicles at the start of June, reflecting a 48% increase from the previous year. Strong production levels are expected to translate into extended days’ supply, thereby providing shoppers with a greater abundance of vehicle options as we move forward.
Sweeter Discount Deals Fueling Sales: The increased inventories resulted in more generous incentives being offered to potential buyers. Several manufacturers, including Ford, Hyundai and General Motors among others, have witnessed a significant surge in their incentive outlays. According to TrueCar, the average incentive amount reached $1,931 last month, representing a 13% increase from April and a substantial 64% increase from May 2022.
By offering generous incentives, automakers and dealers aim to stimulate demand and entice potential buyers into making a purchase. These incentives not only provide financial benefits but also create a sense of urgency and encourage buyers to take advantage of the deals while they last.
Rapidly Increasing EV Popularity Acts as a Vital Catalyst: The rising adoption of green vehicles driven by climate change concerns, technological advancements, and stringent fuel-emission standards is boosting the prospects of the U.S. auto industry. Electric car demand is skyrocketing and EV sales are consistently breaking records.
Last year was the biggest for zero-emission vehicles in the United States. Legacy automakers are making significant efforts to establish a strong presence in the thriving e-mobility sector. The Inflation Reduction Act is set to further fuel EV sales. With the continued momentum and expected future growth, the prospects of the U.S. auto industry in the EV market are highly promising.
Zacks Industry Rank Indicates Solid Prospects
The Zacks Automotive – Domestic industry is an 18-stock group within the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #76, which places it in the top 30% of 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 two top-ranked stocks from the industry, let’s take a look at the industry’s stock market performance and current valuation.
Industry Lags S&P 500 But Tops Sector
The Domestic Auto industry has underperformed the Zacks S&P 500 composite but outperformed its larger sector over the past year. The industry has lost 15.8% against the S&P 500’s growth of 4.1%. The sector has declined 18.9% over the said time frame.
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 14.80X compared with the S&P 500’s 12.99X and the sector’s 12.22X. Over the past five years, the industry has traded as high as 57.29X, as low as 8.78X and at a median of 15.31X.
2 Best Stocks to Buy Now
Ford: It is one of the leading automakers in the nation. A strong vehicle mix supported by F-series trucks and SUV models, combined with a robust EV lineup, should drive Ford’s growth. The company has tremendous growth opportunities, particularly with highly coveted franchises such as the F-150, the new Maverick, the new Bronco, and, undoubtedly, the Mustang.
Further, Ford’s ambitious rejig plan to split its EV business into a separate unit within the company is set to unlock significant growth opportunities. Ford’s target of producing over 2 million EVs by 2026-end (representing 49% CAGR over the span of 2023-2026) augurs well. The company’s high liquidity provides a solid foundation for investment in Ford+ priorities.
Ford currently sports a Zacks Rank #1 (Strong Buy) and has a Value Score of A. The Zacks Consensus Estimate for F’s 2023 sales implies year-over-year growth of 7.5%. The consensus mark for Ford’s 2023 and 2024 EPS has moved north by 4 cents and 3 cents, respectively, over the past seven days. Over the trailing four quarters, the stock surpassed estimates on two occasions for as many misses, the average surprise being 24.3%.
General Motors: One of the world’s largest automakers, General Motors held the largest share of the U.S. auto market at 16% in 2022.General Motors’ compelling portfolio with strong demand for its quality full-size pickups and SUVs bode well. The company’s hot-selling brands in America like Chevrolet Silverado, Equinox and GMC Sierra are driving the top line.
Encouragingly, this legacy U.S. automaker will have nine EV models in the North America market this year, which will buoy top-line growth.The company’s Ultium platform and battery plants in Ohio, Tennessee and Lansing are set to scale up its e-mobility prowess. Its superior liquidity profile also instills confidence. General Motors’ strides in autonomous vehicle development also augur well for long-term growth.
GM currently sports a Zacks Rank #1 and has a Value Score of A. The Zacks Consensus Estimate for General Motors’ 2023 sales implies year-over-year growth of 4.5%. The consensus mark for GM’s 2023 and 2024 EPS has moved north by 14 cents and 22 cents, respectively, over the past 30 days. Over the trailing four quarters, the stock surpassed estimates on three occasions and missed once, the average surprise being 15.5%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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