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3 Auto Stocks Speeding Past Rivals, Say Analysts

A few months ago, it looked like auto stocks were being left in the dust as a result of widespread sales declines. Auto data firm Edmunds reported on June 26 that auto sales fell 2% during the first half of 2019, representing the industry’s second year-over-year sales dip since the Great Recession. Sales for the whole year are expected to drop to 16.9 million, down from 17.3 million in 2018. However, with lower interest rates and higher inventories presenting attractive buying opportunities for consumers, analysts argue that opportunities can once again be found within the automotive industry for compelling investments.

Here are 3 auto stocks that analysts believe are revved up and ready to go.    

Ford Motor Company (F)

While Ford shares have plummeted 7% in the last month, some analysts are saying now is the time to buy.

The company has shifted efforts towards restructuring its operations. Management has stated that the focus of the European segment of its business will now be placed on its commercial vehicle sales, as that is its strength in the region. F has also made progress in reducing its capital expenditures and getting its EBIT margin closer to 6%.

Ford announced that it will spend $11 billion over the next few years to develop and manufacture electric vehicles. It will start developing electric, hybrid and plug-in hybrid-power versions of the Explorer and Escape, its two most popular SUV models. They are expected to be released in 2020. To appeal to construction workers, F is designing an electric F150 pickup truck. The trucks would be able to charge power tools.

On July 12, the company announced that it had expanded its partnership with Volkswagen AG (VWAGY) to add autonomous and electric vehicles to the list of joint projects.

Morgan Stanley believes that the dip represents a unique buying opportunity for investors. Top analyst, Adam Jonas, upgraded F to a Buy and set a $12 price target, suggesting 26% upside potential. “Our upgrade is driven by three main factors: (1) restructuring actions; (2) strategic actions; and (3) product mix enhancement. Additionally, our previous concerns over Ford’s ability to maintain its dividend payment have largely subsided,” he said on August 6.

UBS analyst, Colin Langan, agrees that investors should buy Ford while the stock is down. On July 1, he reiterated his Buy rating while raising the price target from $12 to $13. He believes share prices could surge by 36% over the next twelve months. The analyst boasts a 67% success rate and gets an average return of 10% per rating.

F has a ‘Moderate Buy’ analyst consensus and a $12 average price target, indicating 29% upside potential.

General Motors Company (GM)

Despite a drop in income from China, analysts tell investors not to worry.

On August 1, General Motors reported that its second quarter net revenue dropped 2% from the prior-year quarter to $36.1 billion. The decline occurred after its China income plummeted over 60% from the year-ago quarter. GM’s domestic deliveries of full-size trucks were also down 7% year-over-year.

Management highlighted the fact that despite the delivery and income dip, operating profit in North America remained stable at almost $5 billion. The company did report double-digit sales growth for its crew-cab pickups in each of the first two quarters of 2019, implying that the underlying demand for the company's trucks remains strong. GM also increased its annual production capacity by 20,000 units for light-duty trucks and 40,000 units for heavy-duty trucks.

“As a result, sales of light-duty trucks -- the higher-volume part of the market -- should return to growth in the second half of 2019. Supply constraints may continue to weigh on sales of heavy-duty trucks this quarter, but sales growth should resume before year-end in that segment, too,” top financial blogger, Adam Levine Weinberg writes. 

Citigroup analyst, Itay Michaeli, believes that “GM has a story that is unique and compelling”. On August 2, he reiterated his Buy rating and raised his price target from $67 to $68. Michaeli believes share prices could skyrocket by 73% in the next twelve months. “Its fleet age that suggests pent-up demand through 2024 and pickups appear less susceptible to industry disruption. We like management’s confidence about the second half outlook, and while the consensus has GM turning in a year over year decline in 2020, we believe GM can grow EPS next year,” the analyst said.

The Street is bullish on this auto stock. GM boasts a ‘Strong Buy’ analyst consensus and a $53 average price target, suggesting 34% upside.

Ferrari NV (RACE)

Ferrari stands out from the other stocks on our list because it doesn’t want to sell too many cars. Its luxurious image and brand reputation are built on its exclusivity and high prices.

RACE trades at 35x its estimated 2020 earnings, vastly exceeding the Russell 3000 Auto & Auto Parts Index’s 9.7x multiple. Its margin on EBIT is 24.1%. Bayerische Motoren Werke AG (BMWYY), Ford and GM all trail behind at 8.1%, 2.5% and 6.8%, respectively. 

By the end of 2022, the company plans to develop 15 new models. Management claims the sales generated from these models could almost double its profits, making the company more secure as U.S. light vehicle sales slow down.

Top financial blogger, Daniel Miller, argues that Ferrari’s first SUV, which is expected to be released in 2022, could send margins even higher. “Even more intriguing are its plans for its first SUV, which could boost margins even higher and appeal to more Chinese buyers, who crave SUVs. The number of wealthy consumers in China has grown large enough that Ferrari can expand its sales there without compromising its brand exclusivity or watering down its pricing,” he writes.

Societe Generale analyst, Stephen Reitman, agrees that Ferrari’s growth is poised to speed up. On August 5, he upgraded the rating from a Hold to a Buy and raised the price target from $141 to $183, suggesting 16% upside. “Ferrari is targeting over 38% EBITDA margin in FY22, a level likely to match European luxury goods sector outlier Hermès, whose business model Ferrari increasingly resembles, in our view. We now believe it can justifiably be valued on Hermès’ multiples,” he said.

RACE has a ‘Strong Buy’ analyst consensus and a $182 average price target, implying 15% upside.

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