Auto Equipment Outlook: Cost & Technology Bumps Ahead
Zacks Investment Research | Aug 13, 2019 07:27AM ET
The Zacks Zacks Industry Rank , which is basically the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 negative earnings outlook for the constituent companies in aggregate. Over the past year, the industry’s earnings estimate for the current year has moved down 25.6%.
Despite the industry’s bleak near-term view, we will present a few auto original equipment stocks that one can consider. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector & S&P 500
Over the past year, the Zacks Original Equipment industry has lagged the broader Auto sector as well as the Zacks S&P 500 composite. The industry has declined 18.1% over this period compared with the S&P 500’s rise of 1.3% and broader sector’s fall of 14%.
Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is a commonly used multiple for valuing auto stocks, the industry is currently trading at 6.54X, lower than the S&P 500’s 10.7X. Additionally, the industry’s figure is below the sector’s trailing-12-month EV/EBITDA of 9.44X.
Over the past five years, the industry has traded as high as 11.14X, as low as 4.63X and at a median of 6.81X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
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Bottom Line
The industry’s success depends on how well the players manage escalating costs incurred on mass manufacturing and evolving technology. Also, the ability of the industry to comply with the new emission norms is a challenge. However, growing demand from the emerging economies is a tailwind.
Some top-ranked stocks in the Zacks Original Equipment space are Allison Transmission Holdings, Inc. (ALSN), Meritor, Inc. (MTOR) and Gentex Corporation (GNTX), each of which currently carries a Zacks Rank #2 (Buy). You can see .
Allison Transmission: This Indianapolis, IN-based company is a designer and manufacturer of fully automatic transmissions for medium and heavy-duty commercial, and heavy-tactical U.S. defense vehicles. The Zacks Consensus Estimate for the current-year EPS of this company has moved 4.1% north over the past 30 days.
Price and Consensus: ALSN
Meritor: The consensus EPS estimate for this Troy, MI-based global automotive parts manufacturer and supplier has increased 5.1% over the past 30 days.
Price and Consensus: MTOR
Price and Consensus: GNTX
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