The automotive, or auto, industry is already massive but continues to grow. According to Statista.com, in 2017 the global industry was worth $5.3 trillion and this number is expected to grow to $8.9 trillion by 2030.
Within the auto industry there are a variety of types of companies: auto manufacturers, car dealerships, auto parts and service companies, etc. Many of these companies have seen their stock prices surge in the past year and there’s no reason to think that this momentum should slow down in 2021. Especially because the automotive industry is beginning to go through a massive transformation. Two emerging trends, electric vehicles and autonomous driving, have already begun to revolutionize the auto industry. In the not too distant future, it’s predicted that the majority of vehicles sold will be powered by electricity, rather than internal combustion engines (ICE), and will not require a driver to operate them.
Due to the demand for this new technology and the “return to normal” after the coronavirus pandemic subsides, now could be a great time to invest in the auto industry. In this article we evaluate 5 companies that we think stand to outperform in 2021: Honda Motor Company Ltd. (HMC), Winnebago Industries Inc. (WGO), AutoZone Inc. (AZO), Magna International Inc. (MGA), and AutoNation Inc. (AN).
Let’s take a look at the auto industry before we analyze these 5 stocks:
History of the Automotive Industry
While the automotive industry officially started near the end of the 19th century, it didn’t take off until Ford (F) created the first Model T in 1913. The car was manufactured on an assembly line, which was considered groundbreaking technology at that time. It made cars more affordable for consumers while allowing the company to increase its production daily.
Since then, the industry has seen the number of automakers explode with car companies all over the world. Regular cars were joined by trucks, SUVs, and campers. Traveling became more accessible, and cities grew larger due to the automobile. Before the computer, no invention shaped life more than the automobile. Now the automotive industry includes not only auto manufactures but also auto parts companies and auto dealers.
Plus, other industries depend on cars for sales. For instance, energy companies produce oil for cars, and almost every industry relies on trucks to get their products from suppliers to stores. There are approximately 1.5 billion cars globally, and that number is expected to grow to $3 billion by 2050.
Electric Vehicles and Autonomous Driving
While the assembly line revolutionized auto manufacturing over a century ago, electric vehicles and autonomous driving are poised to revolutionize the industry in this century. As cars have become a massive part of our lives and an integral part of our economy, they have also done significant damage to the planet by adding billions of tons of carbon into the atmosphere.
In fact, close to one-third of all greenhouse gases are caused by transportation. Also troubling is that over 1 million people die per year from car accidents. This has led automakers to innovate with electric cars and autonomous driving. So far, Tesla (TSLA) has been the leader in the race for electric cars and autonomous cars, and there’s no denying its stock has soared due to the enthusiasm of its future.
Now, virtually all automakers are making investments in these technologies. Some of the world’s biggest automakers, such as General Motors (GM) and Volkswagen (VWAGY), are gearing up to release their own lineups of electric cars to stay competitive in what looks like an electric future.
Economics of the Auto Industry
Automotive stocks tend to be cyclical, which means that consumers typically buy less of a product or service if they’re worried about the company. So, when the economy is declining, there are typically fewer people buying cars. This leads to lower profits for car companies and usually lower stock prices. This was certainly the case last year when companies were hit hard by the pandemic.
Most factories were shut down at some point last year, and many dealers ran short of some models. This initially led to lower stock prices, but electric car companies, such as TSLA and several smaller E.V. start-ups, saw their shares soar later in the year due to electric vehicles’ enthusiasm.
The automotive industry outlook looks good this year as car sales are expected to see a sharp recovery in China, Europe, and the U.S., compared to the sluggish sales in 2020. The sales of more inexpensive used vehicles are expected to be especially strong. Plus, aftermarket retailers are benefiting from a maintenance demand due to the recent trend in used car purchases.
An improving economy, stimulus payments, and improving employment levels should also help sales volumes. While the industry’s outlook looks positive, there has been one major hiccup: a shortage of chips. The demand for semiconductors skyrocketed last year, especially for P.C.s, leading to a worldwide chip shortage.
The shortage is affecting many industries, but particularly automobiles. Auto manufacturers need chips to create cars, so some of the world’s biggest car companies have indicated that they plan on cutting production. The good news is that President Biden’s administration has gotten involved and is working to shore up crucial supply chain items.
Automotive Stocks to Buy in 2021
Honda Motor Company, Ltd. (HMC)
Originally a motorcycle manufacturer, HMC was founded in 1948. Today, the company makes automobiles, motorcycles, and power products such as boat engines, generators, and lawnmowers. It also makes robots and private jets. It is currently Japan’s third-largest automaker by sales and has the highest exposure to North America out of Japan’s big three.
The company’s brand and its reputation for quality have helped drive demand for its models. HMC has also been historically known for fuel-efficient cars, which has positioned it to take advantage of consumer demand for more fuel-efficient vehicles. The popularity of its vehicles has also allowed it to use fewer incentives than other automakers, boosting its profits and improving its cars’ resale value.
Like most automakers these days, the company is investing in electric vehicles with its Honda 2030 Vision. HMC has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The company has a Growth Grade of B, which isn’t surprising given its growth forecasts. Earnings are expected to rise an average of 18.6% over the next five years.
HMC also has a Value Grade of A, which makes sense with a trailing P/E of 9.45 and a forward P/E of 9.29. We also grade HMC based on Momentum, Stability, Sentiment, and Quality, which you can find here. HMC is ranked #1 in the Auto & Vehicle Manufacturers industry. You can find other top stocks in this industry by clicking here.
Note that AGCO is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.
Winnebago Industries Inc. (WGO)
WGO manufactures Class A, B, and C motorhomes and towables, customized specialty vehicles, and parts and services. The company expanded into towables in 2011 with the purchase of SunnyBrook and then Grand Design in 2016. Towables now make up 82% of the firm’s R.V. unit volume. WGO expanded into boating in 2018 with the acquisition of Chris-Craft and then Newmar in 2019.
The company has a considerable R.V. backlog that showcases the impressive demand for R.V.s over the past year, especially during the pandemic as families chose to travel by R.V. instead of flying. While this demand may slow some, that isn’t likely to happen until at least 2022. WGO’s continued cost-reduction efforts should also aid its bottom line.
WGO has an overall grade of B or a Buy rating in our POWR Ratings service. Like HMC, WGO is also forecasted for strong growth, resulting in a Growth Grade of A. Analysts expect the company’s revenue to rise 142.50% and earnings to soar 776.9% this quarter. The company also has a Momentum Grade of B, which isn’t surprising as the stock has shown bullish momentum over the long term.
To access all of WGO’s grades (Value, Stability, Sentiment, and Quality), click here. WGO is ranked #17 in the same industry as HMC, Auto & Vehicle Manufacturers.
AutoZone Inc. (AZO)
As I mentioned earlier, automakers are not the only companies in the automotive industry. Auto parts are also big business. AZO is the nation’s largest auto parts and accessories retailer, with almost 5,900 stores in the U.S. The company sells aftermarket automotive parts, tools, and accessories to do-it-yourself customers in the United States.
In addition to long-term solid industry fundamentals due to the record-high U.S. vehicle age, the company benefits from a strong brand, high customer engagement, and the success of its proprietary label products. AZO’s leadership standing in the DIY segment has provided a strong national store network that it can leverage to expand DIY sales. The company is also expected to grow through a combination of new store openings and same-store sales growth.
AZO has an overall grade of B, which is a Buy rating in our POWR Ratings system. The company has a Sentiment Grade of B, which means it is well-liked by analysts. According to the StockNews Price Target feature, sixteen analysts hold a Strong Buy or Buy rating on the stock. AZO also has a Quality Grade of A due to its healthy balance sheet. The company had $1 billion in cash and cash equivalents as of the most recent quarter, compared with very little short-term debt.
Magna International Inc. (MGA)
MGA is one of the world’s largest and most diversified auto suppliers. It manufactures auto interiors, engine parts, interior and exterior trim, body structures, mirrors, electronics, sunroofs. Its capabilities are so diversified, the company even designs and assembles complete vehicles. The company has been growing in leaps and bounds due to takeovers from competitors and the consolidation of smaller companies.
MGA is benefiting from disruptive technologies such as powertrain electrification and autonomous technologies. The U.S. election result was another win for the company due to the administration’s policies that would subsidize electric and autonomous vehicle technologies. Plus, automakers are consolidating their purchases with fewer suppliers, making MGA the primary beneficiary since their offerings are so broad.
The company has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. MGA has a Value Grade of B, which makes sense since with a forward P/E of 13.85. The company also has a price-to-cash-flow ratio of 13.8, which is well below the industry average. The firm has a Momentum Grade of B as it has shown positive momentum over the mid and long-term.
We also grade MGA on Growth, Stability, Sentiment, and Quality. You can find those grades here. MGA is ranked in the same B-rated industry as AZO, Auto Parts.
AutoNation Inc. (AN)
AN is the largest automotive dealer in the United States, with over 230 dealerships. The firm also has five AutoNation USA used-vehicle stores and 81 collision centers all across 16 states, primarily in Sunbelt metropolitan areas. The company also sells used vehicles, parts, and repair services, as well as auto financing.
The company has recently refocused its efforts towards new initiatives, including standalone used vehicle dealers, expanded collision centers, and branded aftermarket parts. In addition to the current five, the firm announced plans to open at least 95 more AutoNation USA used vehicle stores by 2030. With more used-vehicle stores, the company can retail more of its used-vehicle trade-ins instead of dumping them into auctions where it loses money.
Plus, its investment in autonomous driving company Waymo only adds to its potential upside. AN has an overall grade of A or a Strong Buy rating in our POWR Ratings service. The company has a Value Grade of A due to its paltry forward P/E of 10.54. AN also has a Momentum Grade of B as its stock has been long-term momentum.
For more of AN’s grades such as Value, Stability, Sentiment, and Quality, click here. AN is ranked #4 in the B-rated Auto Dealers & Rentals industry. For more top stocks in that industry, make sure to click here.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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