Investors in automotive stocks had a horrible time in 2022. After a painful year, investors likely could use some new car ideas, and should also know what to avoid.
Rising interest rates, supply chain problems, inflation, and and a slowing global economy have punished car-related shares. The average car stock in the Russell 3000 Auto & Auto Parts Index dropped roughly 40% in 2022.
So Barron’s took a look at the largest U.S. car stocks—including auto makers, parts suppliers, dealers, and service providers—and sifted through the highest and lowest Buy-rating ratios among Wall Street analysts. That ratio is the number of Buy-equivalent ratings divided by the total number of ratings.
Analyst ratings are only one way to screen for investing ideas. Of course, analysts’ calls aren’t always correct, but they are paid to know their industries and companies. They also spend a lot of time talking with institutional investors, helping set expectations. That makes ratings, at the very least, a good indicator of what investors are thinking.
The five most popular automotive stocks among analysts, starting with the most popular, are car auctioneer
(ticker: CPRT); parts maker
(APTV); new car dealer
(LAD); aftermarket parts seller
(ORLY); and electric-vehicle pioneer
|Company / Ticker||Recent Price||Market cap (bil)||Buy Rating Ratio||2023E P/E|
|Tesla / TSLA||117.10||$367.10||64%||22|
|O’Reilly / ORLY||824.46||51.6||71||23|
|Lithia / LAD||222.72||6.1||73||6|
|Aptiv / APTV||99.22||26.9||74||20|
|Copart / CPRT||61.69||29.4||80||24|
Sources: FactSet, Bloomberg
One caveat we imposed on our screen of favored car stocks is that a company must be profitable.
(RIVN), for instance, is popular with analysts, but it doesn’t make any money and isn’t expected to do so until 2027 or 2028.
These Wall Street darlings are down about 23% over the past year, on average. The
Dow Jones Industrial Average
are down 16% and 6.4%, respectively.
The average Buy-rating ratio for the group is about 72%. Copart is the most popular, with 80% of analysts covering that company rating shares Buy. The average price-to-earnings ratio on estimated 2023 earnings is about 19 times for this group of five. That’s very high for car company stocks—shares of most auto makers and parts companies trade for single-digit PE ratios.
A theme for Wall Street lately has been to stick with things that can weather a 2023 economic storm. Tesla does seem to qualify in that regard, too. It has leading profit margins, and should still sell more EVs in 2023 than 2022, no matter what the economy does. As for O’Reilly, aftermarket parts sellers tend to do well when times get tough. Cars stay on the road longer, ultimately needing repairs.
One thing this list of top picks also suggests is that a low PE ratio alone isn’t reason to buy an automotive stock. Analysts, for instance, aren’t aggressively recommending General Motors (GM) and
(F) shares, which trade for roughly 6 and 7 times estimated 2023 earnings, respectively. The Buy-rating ratio for GM is average at 58%, while the Buy-rating ratio for Ford is lower at about 40%.
Analysts can’t seem to get comfortable with what those stocks will do in 2023 amid rising interest rates, a slowing economy, and falling car prices. It’s a tough year to call for the auto sector.
Ford stock, in fact, has one of the lowest Buy-rating ratios within the auto sector. The five “least popular” auto stocks, starting with the lowest Buy-rating ratio, are used car dealers
Penske Automotive Group
(PAG), parts maker
(LEA), Ford, and parts maker
The average Buy-rating ratio for those stocks is about 30%. Carvana has the lowest, with only about 11% of analysts covering that company rating its shares Buy. The average PE ratio— excluding Carvana, which isn’t profitable—is about 9 times estimated 2023 earnings. The group’s shares, excluding Carvana, have tumbled about 28% over the past 12 months, on average.
Carvana stock has dived about 98% as investors worry the company has too much debt and no free cash flow. Wall Street projects Carvana’s business will use cash, versus generating free cash flow, for the coming few years. What’s more, analysts project the company will end the year with about $7.6 billion in total debt, against an expected operating loss of roughly $1.3 billion.
It appears analysts don’t like used car dealers beyond Carvana as well, including Penske. That’s because the Street fears falling used car prices, which dropped 13% year over year in December. Falling prices could eat into profit margins. Analysts also aren’t sure about auto makers and auto suppliers such as Lear and
in a weak economic environment. Low valuations just aren’t enough for analysts to step back in and recommend shares.
For the automotive sector as a whole, Wall Street seems plenty nervous about a recession and its potential negative impact on car demand. While there is no guarantee analysts are right, current new car sales in the U.S. are about 20% below prepandemic levels. In the past, new car sales have typically dipped when a recession arrived.
Parts and semiconductor shortages constrained global car production for years, though, which had sent new and used car prices soaring in recent years. Now it’s a odd setup for car investors in 2023, with low volumes headed into a downturn. Investors could choose to ignore the Street and buy cheap auto maker stocks. Or they can look at a few of the stocks analysts still like.
Whatever investors choose, 2023 should be a bumpy ride.
Write to Al Root at email@example.com
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