Auto Stocks Worth Investing In 2018

Automotive companies in the United States had a record year in 2016 as they enjoyed bumper sales. However sales fell in 2017 marking the first year since the global financial crisis that the number of vehicles sold recorded a year-over-year decline. In 2016 the number of cars sold per Autodata was 17.85 million units while in 2017 the figure was 17.2 million units.

It is widely expected that sales in the automotive industry will decline in 2018 despite the economy recording strong growth. One of the reasons for this is the fact that interest rates are expected to rise. Additionally there is a high number of off-lease vehiclescoming into the market. There has also been a shift in consumer preferences with sports utility vehicles and pickup trucks being preferred over passenger cars and this has posed a challenge to automakers. But as much as it is a challenge for motor companies, it also presents an opportunity as SUVs and trucks generally enjoy better margins compared to passenger cars.

North American Free Trade Agreement

Other factors that pose a risk to the demand for vehicles in the United States includes the decisions the Trump administration makes on North American Free Trade Agreement. In the event that Trump decides to withdraw the United States from NAFTA there is likely to be reduced economic growth leading to volatility in the stock market and consequently a rise in the prices of consumer goods and this includes autos.

This might weaken demand in 2018’s second half. The supply chain for the automotive sector is also likely to be disrupted and this could lead to unavailability of parts or parts could become more expensive since they would have to be sourced from far-off areas.

However there are analysts who expect auto sales to remain healthy despite the return of high interest rates and this is attributed to positive consumer sentiment, falling unemployment as well as the tax reforms that were enacted last year. All these factors are expected to boost and support demand for both new and used vehicles.

Interest rates

Additionally high interest rates are unlikely to be much of a discouragement for would-be buyers of autos. In the case of an average buyer who obtains financing of approximately $30,329 when interest rates are increased by 100 basis points such an individual will only be required to pay an extra $14 per month. When interest rates are raised by 200 basis points the monthly payment increases by around $29. Thus the expected interest rate increases are unlikely to deter buyers by a significant figure.

That said not all stocks in the auto segment are buys since not all have attractive valuations. Dealerships such as Sonic Automotive and AutoNation will likely see their profits clipped in a high interest-rate environment. Both dealerships have high variable debt balances and this is as a result of a floor-plan financing which means that when there is a rise in rates the interest costs also go up. In contrast some of the auto stocks that possess attractive valuations include Tenneco, BorgWarner, Ford Motor Company, and General Motors.

Ford Motor Company

One of the factors that make the stock of Ford Motor Company attractive is the fact that it is a great dividend stock. Currently the stock enjoys a dividend yield of approximately 6.82%. The carmaker which is more than a century old is at the moment distributing around 31.37% of its profits to shareholders. In the next couple of years analysts expect this figure to rise to 38.69%.

Despite the fact that Ford’s dividend yield has seen some volatility in the last decade the dividend per share has risen from zero to $0.73. This represents an earnings per share growth of around 65.41%. During the same period the auto industry in the United States has enjoyed an earnings per share growth of 31.42% and this means that Ford has outpaced the rest of the sector.

Tenneco

At 1.78% the dividend yield of Tenneco may not be as high as that of Ford Motor Company but the company price to sales ratio of 0.32 which makes the stock an attractive investment. Over the last five years Tenneco, which manufactures ride and emission control systems for commercial, light as well as specialty vehicles, has enjoyed a yearly earnings per share growth of 19.90%.

Among analysts Tenneco enjoys a mean recommendation of 2.50 which places it between buy and hold. Other metrics of Tenneco includes a return on assets value of 5.70% while the return on investment value is 26.30%. The price to earnings ratio value of Tenneco on the other hand is 14.26. Tenneco’s return on equity value is 32.58.

BorgWarner

In its most recent reported quarter the earnings per share value of powertrain manufacturer BorgWarner was $1.07 and this managed to beat the consensus estimates among analysts which was $1.01. Last year in a similar quarter BorgWarner generated an earnings per share value of $0.85. Analysts had been expecting revenues of $2.53 billion but BorgWarner managed to beat that as well by bringing in $2.59 billion in the quarter.

When compared to the rest of the industry the price-to-sales ratio of BorgWarner is lower at 1.12 versus the sector’s average of 1.96. Generally an investment is more attractive the lower the ratio.In the past half a decade sales of BorgWarner have been growing at an average annual growth rate of 6.40% while the earnings per share growth has averaged 10.10%. Among analysts the mean recommendation of BorgWarner is 2.60.

General Motors

One of the Wall Street firms that is optimistic about the stock of General Motors is Bank of America. The investment bank has placed a buy rating on the stock and a price target of $60. This is based on the most recent statistics which shows it is still in the lead with regards to market share in the United States. In the month of February GM’s market share was 17.3% compared to Ford’s 15.2% and Fiat Chrysler Automobiles’ 11.2%. Part of the reason BofA has confidence in GM is the strong management behind it and which is expected to handle a downturn better than rivals.

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