Company / Analytics

Analytics, 16 July 2022

Automotive stocks you should consider today

The first half of the year was brutal to most, and by extension, automotive stocks. Analysts are however positive for the second half of the year.

The electric vehicle revolution is accelerating, China’s lockdowns are winding down, supply chains are recovering and oil prices are finally dropping. All these factors are likely to improve the situation with automotive stocks.

The recent, sharp decline of oil prices should dramatically lower inflation, enabling the Federal Reserve to lower interest rates at a much slower pace going forward and making new vehicles more affordable. Lower gasoline prices will also incentivize more Americans to buy large vehicles.

In a note to clients on Friday, JP Morgan analyst Rajat Gupta explained that while price targets are lower on many of the names populating the space, the recent selloff across the sector has punished many names to a far too great a degree. Gupta noted that valuations “at trough levels” signal a likely overdone selloff.

Automotive stocks to watch right now

General Motors (GM)

General Motors (NYSE: GM) recently reported that, amid “lingering supply chain disruptions” it had sold 15% fewer vehicles in the U.S. in the second quarter (Q2) than during the same period a year earlier. But analysts had, on average, expected a larger year-over-year decline of 16% to 17%, according to Seeking Alpha. Moreover, the automaker’s U.S. market share rose one percentage point in Q2 versus Q1.

Meanwhile, despite the very high gas prices, GM’s large, high-margin trucks sold very well, as it “delivered its best-ever first half retail market share.” On the EV front, the automaker sold over 7,000 vehicles in the first quarter, which was an encouraging development.

As I’ve noted in the past, GM has many, highly promising EVs waiting in the wings, while its Cruise unit recently “took a major step forward by offering paid rides in driverless vehicles for the first time.”

Despite all of these strong, positive catalysts, GM stock has a forward price-to-earnings (P/E) ratio of just 4.6.

Volkswagen (VLKAF)

The highly respected European automaker Volkswagen (OTCMKTS: VLKAF) recently received a great honor that makes its stock quite intriguing. Specifically, Bloomberg Intelligence wrote that Volkswagen would sell more EVs than Tesla in just 18 months.

Currently delivering more EVs than Elon Musk’s firm in the huge European EV market, Volkswagen is starting to make major inroads in America, where it sold over 37,000 EVs last year.

Bloomberg believes that the initial public offering of Volkswagen’s Porsche unit will provide Volkswagen with a significant amount of funds, helping it to make the necessary investments in its EV business. Also aiding VLKAF stock over the long term will be the E.U.’s recent decision to attempt to ban the sale of conventional vehicles by 2035.

In 2021, the European automaker’s operating income came in at a very strong $26 billion, up from $22.75 billion in 2020. Despite all of these positive catalysts, VLKAF stock has a forward P/E ratio of just 5.16.

Arrival (ARVL)

As I pointed out in my Jun. 24 column, Arrival (NASDAQ:ARVL), an EV start-up, “continues to accumulate impressive achievements.” This includes a recently announced alliance with a major company — Enel. Under the agreement, the companies are poised to work together to sell Arrival’s electric buses.

Moreover, in May, the E.U. certified Arrival’s van. In the current quarter, the automaker expects to start actually producing its van.

A big reason for the huge decline of ARVL stock this year is likely the fear of the automaker running out of money, as Arrival had a relatively small amount of cash — $796 million — as of the end of last quarter. But in addition to its alliances with UPS (NYSE: UPS) and Uber (NYSE: UBER), Arrival has received sizeable investments from several huge financial institutions, including Blackrock (NYSE: BLK), Morgan Stanley (NYSE: MS), and the State of Wisconsin Investment Board. Therefore, I am convinced that the automaker could easily raise additional funds if it needs to do so.

Rivian (RIVN)

Validating my thesis that the market is underestimating Rivian’s (NASDAQ: RIVN) production capabilities, the EV start-up assembled 4,401 EVs during Q2 and distributed 4,467 EVs in the same time period.

The automaker added that it is still “on track to deliver on the 25,000 annual production guidance previously provided.”

Like Arrival, there’s no need to worry about Rivian going bankrupt. The company had a gigantic amount of cash — $116.4 billion — on its balance sheet at the end of Q1. Moreover, in the unlikely event that it needs more cash, I’m sure that its top customer, Amazon (NASDAQ: AMZN), would be willing to buy more RIVN stock if necessary.

Another important accomplishment for Rivian was the automaker’s recent launch of its first three charging stations. The company intends to launch its own charging network, which should give it a meaningful advantage over many of its rivals in the EV sector.

Investors’ Note

The Automotive space remains to be a very interesting space for investors. Most automotive stocks are in losses and to analysts, this provides a buying opportunity in the long term.

Markets are however unpredictable, and investors should bear in mind all risks involved with investing in stocks.

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