The Zacks Domestic Auto industry is facing challenges, with new vehicle sales in the United States declining around 2% year over year in the third quarter. Analysts expect continued volatility due to uncertainty surrounding the upcoming U.S. presidential election and potential disruptions in fourth-quarter shipments caused by dock worker strikes. Automakers are grappling with squeezed margins amid huge incentives, given the high inventory levels.
Additionally, escalating labor costs due to the UAW wage agreements are further straining profitability. Nonetheless, stocks like Tesla, General Motors and Blue Bird Corp. seem better positioned to counter the headwinds.
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 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 Themes at Play
Vehicle Sales Slowing Down: New vehicle sales in the United States dropped by around 2% year over year in the third quarter, marking the second consecutive quarterly decline, according to U.S. Automotive News. Industry experts predict continued market volatility for the remainder of the year, partly due to uncertainty surrounding the upcoming U.S. presidential election in November.
Additionally, a prolonged strike by dock workers at the East Coast and Gulf of Mexico ports could potentially disrupt fourth-quarter shipments of imported light vehicles. Notably, the S&P Global Mobility revised its 2024 U.S. sales forecast down from 16 million to 15.9 million vehicles and lowered its North American light-vehicle production outlook to 15.5 million.
Generous Incentives Denting Margins: New-car and light-truck inventories reached 2.8 million last month, marking a 40% increase compared to the previous year. To drive sales, automakers have been ramping up incentives, with the average discount per vehicle surging 63% from September 2023, according to J.D. Power and GlobalData. Incentives, as a percentage of the sticker price, are expected to reach 6.2% — up 2.4 percentage points year over year. However, these aggressive discounts are putting pressure on automakers' margins, which are already strained by elevated manufacturing costs.
Escalating Labor Costs: The labor negotiations by the United Automobile Workers (UAW) have resulted in wage increases of up to 60% for new hires, which could affect the entire auto industry, including production costs and profit margins. General Motors and Ford anticipate that their costs will rise by about $9 billion over the next four years due to this agreement. Although most input costs for automakers have decreased since their peak during the pandemic, the substantial wage increases in the UAW contract will exert pressure on overall costs in 2024, somewhat counterbalancing the savings from lower input costs.
Zacks Industry Rank Indicates Gloomy Prospects
The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. The industry currently carries a Zacks Industry Rank #212, which places it in the bottom 15% 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 lackluster 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group's earnings growth potential.
Despite the tepid scenario, we will highlight a few stocks from the industry that you can add to your watchlist. Before that, let's take a look at the industry's stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Domestic Auto industry has underperformed the Zacks S&P 500 composite and sector over the past year. The industry has lost around 17.5% against the S&P 500's rally of 33.5%. The sector has declined 14% 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 26.23X compared with the S&P 500's 19.54X and the sector's 15.01X. Over the past five years, the industry has traded as high as 61.82X, as low as 9.93X and at a median of 24.67X.
3 Stocks to Consider
Tesla: This EV pioneer delivered 462,890 cars (439,975 Model 3/Y and 22,915 other models) worldwide in the third quarter, up 4.3% sequentially. The deliveries rose on a year-over-year basis for the first time this year. The company's plans to produce new affordable EV models sooner than expected bodes well.
But TSLA's most lucrative segment is the Energy Generation and Storage business, boasting the highest margins. Its NACS charging business is also set to bolster business. High liquidity and low leverage provide Tesla with the financial flexibility to tap growth opportunities. Additionally, the introduction of Tesla's humanoid robot project (Optimus) and Full Self-Driving (FSD) Beta software (V12.5) rollout signify promising advancements for the company.
Tesla currently has a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the company's 2024 and 2025 sales implies year-over-year growth of 2% and 15%, respectively. While the consensus mark for TSLA's 2024 EPS implies a 27% year-over-year decline, it calls for a 35% rise from the 2024 projected levels.
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
General Motors: It is the top-selling automaker in the United States, benefiting from strong demand for its quality pickups and SUVs, which are driving profit growth. General Motors is on track to achieve its $2 billion net cost reduction program by the end of 2024 and has sufficient cash reserves to handle short-term challenges, with total automotive liquidity of $35.8 billion as of June 30, 2024.
Encouragingly, General Motors targets to achieve positive variable profit on its EVs by the end of 2024, excluding fixed costs. On the back of encouraging first-half performance, GMNA market strength and cost reduction efforts, the company has lifted 2024 forecasts, which sparks optimism. GM now forecasts adjusted EBIT of $13-$15 billion, up from $12.5-$14.5 billion.
GM currently has a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company's 2024 sales and EPS implies year-over-year growth of 3% and 29.3%, respectively. The company surpassed estimates in each of the trailing four quarters, the average positive surprise being 18.8%.
Blue Bird: This century-old school bus manufacturer has successfully expanded into alternative fuels and EV technologies. The company is well-positioned to benefit from rising demand for electric school buses, supported by favorable government policies. Alongside battery-electric models, Blue Bird offers gasoline and propane buses, with propane recognized for its ultra-low emissions.
Blue Bird's focus on improving operations, boosting production efficiency and increasing new orders has driven strong results. In its latest quarterly report, the company exceeded expectations and raised its full-year profit and sales forecast. With a backlog of 5,200 units, including nearly 560 electric buses, and initiatives like EV upgrades and quality improvements, Blue Bird continues to capitalize on robust market demand.
BLBD currently has a Zacks Rank #3. The Zacks Consensus Estimate for the company's fiscal 2024 sales and earnings implies year-over-year growth of 18% and 216%, respectively. In the trailing four quarters, the company surpassed estimates on all occasions, the average surprise being 95.5%.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
