Things have been looking up for the auto industry. After plunging the most in the second quarter since the Great Recession, the U.S. auto industry gathered momentum in the third quarter, with sales rebounding from coronavirus-led lows and buyers returning to showrooms. The momentum is expected to continue. Easier credit conditions with super low auto loan interests are boosting retail sales and making car sales more affordable. Low interest rates are likely to continue for the foreseeable future, which would encourage lending and boost consumer spending. Ramp up of e-commerce initiatives to stoke sales also seems to be paying off. As it is, customers’ interest in car ownership is increasing as they remain keen on ensuring personal safety amid the pandemic. Given the rising infection rates, ride-sharing platforms like Uber UBER and Lyft LYFT are not quite safe.
While coronavirus cases are on the rise, COVID-19 vaccine rollout has given a huge sense of relief to Americans. As we know, the FDA recently approved Pfizer/BioNTech's vaccine and the vaccinations have begun on Monday. Now it looks like the FDA is poised to approve Moderna's vaccine, with emergency use authorization just around the corner. Apart from the vaccine optimism, increased hopes of a fiscal stimulus bill are buoying consumers’ confidence and are expected to lift economic growth. With the auto industry being highly consumer cyclic, it is likely to benefit immensely from these two factors.
Per Fitch Ratings, U.S. light vehicle sales for 2021 are expected to total 15.6 million units, up from the 2020 forecast of 14.2 million units. Most auto players are likely to see a stronger 2021. With mega trends like electric and driverless technology gaining steam, this is a good time to get hold of auto stocks.
Play Large-Cap Stocks
While some investors prefer to maximize value by investing in smaller companies due to potential growth opportunities, others opt for companies with a greater market cap, which can provide a safer and more consistent investment. These large-cap companies enjoy leading market positions, have a global footprint and strong cash positions, and are large enough to remain stable even in the face of unfavorable events. These stocks prove to be more sustainable and profitable for the long term, thereby providing a reliable backbone to any portfolio.
With the help of our Style Score System, we have identified four large-cap stocks that are also value picks. Value investing offers an opportunity to enter the market and pick stocks that have otherwise been overlooked by a majority of investors, and are thus trading at cheap multiples. Our research shows that stocks with Value Style Scores of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer great investment opportunities. You can see the complete list of today's Zacks #1 Rank stocks here .
Our Picks
We have highlighted four large-cap stocks from the Auto Sector with a market cap of more than $10 billion that carry a Zacks Rank #1 or 2. These stocks have strong cash positions, upbeat prospects and a Value Style Score of A or B.
General Motors GM: One of the world’s largest automakers, General Motors leads the U.S. market, having recorded 17% of the industry’s total sales in 2019. Headquartered in Detroit, it has a market cap of around 60 billion, a Zacks Rank #1 and a Value Score of A. With cash being the king of business amid coronavirus-led sluggish economy, the firm’s high liquidity bodes well. It had cash and cash equivalents of $26.9 billion as of Sep 30, 2020 compared with $19.1 billion on Dec 31, 2019. General Motors’ big EV push, including $27-billion investment commitment through 2025, collaborations with Honda Motor HMC and EVgo, along with an amazing line of future electric cars and trucks are expected to boost its long-term prospects. General Motors has an expected EPS growth rate of 9.9% for the next three-five years.
Cummins CMI: One of the leading manufacturers of engines and powertrain-related products, Indiana-based Cummins has a market cap of around 33 billion, a Zacks Rank #2 and a Value Score of B. The company possesses a strong balance sheet, with high liquidity and low debt. Its debt to capital ratio of 0.29 compares favorably with the auto sector’s 0.65. As of Sep 27, 2020, Cummins’ cash and cash equivalents were $2.9 billion, up from $1.1 billion on Dec 31, 2019. The firm’s efforts and investments to ramp up its capabilities in fuel cell and hydrogen production technology in a bid to adapt to the changing dynamics are likely to bolster profitability, going forward. The company has an expected EPS growth of 9%for the next three-five years.
LKQ Corp. LKQ:Headquartered in Illinois, LKQ is one of the leading providers of replacement parts, components and systems. The stock has a market cap of around 11 billion, a Zacks Rank #2 and a Value Score of A. At third quarter-end, LKQ had $2.7 billion in available liquidity, including $2.3 billion available under the credit facilities, and $421 million of cash and cash equivalents. Low leverage of 36% increases its financial flexibility to tap onto growth opportunities.Frequent acquisitions by the firm to expand geographic footprint, improve customer offerings and adopt new technologies are buoying prospects. Soaring free cash flow and cost discipline are other positives. The Zacks Consensus Estimate for fiscal 2021 earnings and sales implies year-over-year growth of 13% and 5.3%, respectively.
Fiat Chrysler FCAU: This Italian-American auto biggie has a market cap of around 34 billion, sports a Zacks Rank #1 and has a Value Score of A. The firm had cash and cash equivalents of €26 billion as of Sep 30, 2020 compared with €15 billion on Dec 31, 2019. Low leverage of 39% indicates balance sheet strength. Fiat’s mega merger with PSA Group, scheduled for closure during first-quarter 2021, will solidify the combined entity’s position in different markets in addition to generating financial and operational synergies. Fiat’s electrification strides including 9 billion euros investment plan through 2022 and key upcoming EV launches like Fiat 500e, full-electric Maserati, hybrid versions of Jeep Compass and Jeep Renegade 4xe bode well. The company’s EPS growth for the next three-five years is projected at 6.5%.
Zacks Top 10 Stocks for 2021
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Start Your Access to the New Zacks Top 10 Stocks >>
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Cummins Inc. (CMI) : Free Stock Analysis Report
Honda Motor Co., Ltd. (HMC) : Free Stock Analysis Report
General Motors Company (GM) : Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU) : Free Stock Analysis Report
LKQ Corporation (LKQ) : Free Stock Analysis Report
Uber Technologies, Inc. (UBER) : Free Stock Analysis Report
Lyft, Inc. (LYFT) : Free Stock Analysis Report
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