The auto industry is a very important sector that reacts
strongly to economic growth or economic slowdowns. For the
month of July 2014, Total U.S. new motor vehicle sales came in at
1.43 million, a 9.1% increase compared to July 2013.
Although the economy seems to be at a point that is higher than
pre-recession levels, auto sales are still in line to reach
pre-recession levels only this year. So as the auto industry
slowly returns to form, investors might want to focus on the best
names in this space. Fortunately, there are several Zacks Rank #1
Stocks in the sector which may be intriguing buys to play off of
this solid trend, such as the three companies highlighted below:
Zacks Top Ranked Auto Stocks
Tesla Motors (
We have ranked the ever-popular Tesla a Zacks Rank
thanks to strong earnings estimate revisions for the current
quarter and year. Tesla Motors reported strong revenue of
$769 million in the second quarter beating their first quarter
reported revenue of $620 million.
In spite of negative EPS (before non-recurring items), Tesla has
beat earnings estimates with an average surprise of 74.44% for the
past year so it will only be a matter of time until Tesla goes into
the positives from this type of earnings look. Furthermore, in the
pipeline, Tesla and Panasonic recently just announced their
Gigafactory agreement which is a large-scale battery manufacturing
facility and is on track for more than 35,000 deliveries in
Tesla has massive potential for growth in the future, especially in
the alternative energy auto market, which is one of the biggest
drivers for investors right now. Tesla will only be able to
ride that wave for so long though, as more progress on the earnings
front, and progress with new models, will be needed to justify
their lofty valuation levels.
We have also given Nissan a Zacks Rank
thanks to positive earnings revisions and an average positive
surprise of 47.75% for the past four quarters. In the second
quarter, Nissan reported strong sales of $24.2 billion and a net
income of $1.1 billion giving an EPS of .54 and a 22.73% positive
surprise. Shares are currently trading at $19.59, up about 1.03%
for the day.
Nissan is the largest of the three stocks in this article, and is
on the right path to gain market share against the US big three
(GM, Ford, and DaimlerChrysler). In order to do this, Nissan
has established a plan for alternative-energy and hybrid vehicle to
try and gain market share in the renewable energy auto
Nissan's challenges will be including volatility in prices of steel
and aluminum in terms of exchange rates along with potential
appreciation of the Yen against the US dollar making sales in the
US less valuable to Nissan.
Tata Motors (
Analysts have ranked Tata motors
given strong positive earnings estimate revisions. Tata is nearing
all-time highs after a positive earnings report for their first
quarter (FY 15) and is currently trading at $45.49 per share.
Revenue was reported at $7.2 billion with a net income of $925
million after taxes.
The strong second quarter was supported by continuing favorable
macroeconomic conditions with solid growth in the US and UK with
continuing growth in China, a key market for Tata. It is also worth
noting that Tata had retail volumes increase by 22% since last year
same period with Jaguar up 12% and Land Rover up 24%.
The company continues to invest significantly in capital
expenditure and R&D and has indicated capital spending will be
in the region of $4.68 million to $4.94 million for FY15. The
United States experienced a strong rebound after the
weather-related disruption in Q1 and recovery in Europe remains
slower but growth in sales in Europe have grown to 13.4% YoY.
While Tata is showing great dependence and reaction to economic
climates across the world, they are eagerly looking for strategies
to limit the volatility of sales in this cyclical industry, while
still tapping into quickly growing emerging markets.
Key statistics and Comparables
Since all three have top ranks and are looking great from an
earnings estimate revision perspective, let's look at some key
ratios in order to differentiate the members of this group. The
forward P/E ratio for Tesla Motors, Nissan, and Tata are 78.52,
12.8, and 9.81 respectively, indicating that Tata is the best bang
for your buck considering the future one year annual estimate of
If we look at Price/Sales (ttm) ratio we see a pretty similar story
of Tesla being overpriced compared to Nissan and Tata Motors.
The P/S (ttm) ratios for Tesla, Nissan, and Tata are, respectively,
13.40, .39, and .70 indicating a high price to pay for Tesla and a
relatively good bargain for Nissan and Tata, with Nissan being the
better of the two.
The PEG ratio tends to tell a different, yet still informative,
story on overvalued and undervalued stocks and the PEG ratio (5
year expected) for Tesla, Nissan, and Tata are, respectively,
4.88, .74, and N/A. This is indicating that
Nissan investors are not fully valuing the stock to its deserved
growth rate and Tesla investors are paying for a rich valuation
Finally, if we look at profit margin as of today investors receive
some more interesting information regarding how these three stack
up. The profit margins for Tesla, Nissan, and Tata are
-6.83%, 3.91%, and 7.06%, respectively, indicating the inefficient
return on sales for Tesla, but Nissan and Tata having similar
returns on sales showing solid return on sales.
Investors and mainstream media love Tesla right now while Nissan
and Tata continue their strong and steady growth in the auto
industry. These key ratios only tell the statistical side of
the story and the fundamental analysis of each stock, but
discovering what these companies have in the pipeline for future
growth is very hard to tell, and all of us will have to wait and
see on that front.
These three auto industry stocks have different aspects to bring to
the table, but they are all strong buys. Whether that is
Tata's stronger growing presence in Europe and Asia, Nissan's move
to becoming a big player in the auto alternative energy market, or
Tesla's potential to change how alternative energy cars are used,
it is important to see why these stocks could have a good
The auto industry is a cyclical business that heavily depends on
consumer prosperity and economic climate, and it is important for
investors to look at the bigger picture of what drives growth for
the auto industry rather than hard numbers on these companies'
Nevertheless, these three auto industry stocks outlined above have
had strong earnings estimate revisions, and given the solid
position of the sector right now, these could really be in the
driver's seat for investor portfolios in the near term.
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