The coronavirus pandemic had sent shockwaves across the global economy, especially the auto sector, in the first half of the year. The U.S. auto sector faced massive disruptions in March and Aprilwithauto sales tanking astronomically. Nonetheless, the sector managed to enter a recovery period in the second half of the year, wherein sales witnessed a rebound from the pandemic-induced downturn. The upbeat trend is expected to continue in 2021 on the back of surging demand for vehicles and the government’s fiscal stimulus packages.
A Sneak Peek Into Sector Performance in 2020 & Projections
The coronavirus pandemic had rattled the auto industry in the United States amid factory closures, low footfall at dealerships, and supply-chain distortions. The industry bore the severe brunt of the coronavirus outbreak in the latter parts of the first and second quarters of 2020, with auto sales hitting a historic low in April. Per U.S. Bureau of Economic Analysis, new vehicle sales in the United States in April were 563,122 units, plummeting 58.5% year on year.
Nonetheless, with the economy gradually recovering from the mayhem caused by the pandemic, auto sales in the country managed to rebound, encouraging major automakers to ramp up production and replenish weak inventories at dealerships. The recovery in the auto industry can be attributed to several factors.
Social-distancing and sanitization measures brought on by the pandemic have prompted buyers to turn away from ridesharing and public transit options, as personal vehicle sare being viewed as one of the safest ways to travel during the pandemic. Moreover, the use of micro-mobility means of conveyance—shared bikes, scooters and skateboards—declined steeply across major U.S. cities. In fact, road trips for vacations became a safer option for people than traveling by airplane or trains.
In fact, owning a new vehicle is much more affordable now owing to low gasoline prices and a reduction in borrowing rates providing additional incentives to the middle-income group.
Recently, the U.S. Congress reached an agreement on the second round of fiscal stimulus for pandemic-led devastations. Per The Wall Street Journal, the $900-billion package is expected to include direct payments of $600 for every adult and child. Moreover, the deal is likely to provide $300 of weekly unemployment payments for 11 weeks and extend two other unemployment programs until they begin phasing out in mid-March and end in early April next year. The idea is to put some money in the pockets of millions of people who have lost their paychecks, permanently or temporarily, during the pandemic. This along with other government subsidies and income support programs is expected to accelerate the recovery of the economy and the highly-cyclic auto industry through 2021.
Defying all the pandemic-induced odds, the Auto, Tires and Trucks sector has rallied 80.9% year to date, outperforming the S&P 500 Index’s growth of 16.4%.
Per the latest Earnings Trends report, the auto sector is expected to see year-over-year earnings growth of 58% in 2021, with the top line expected to be up 16%.
This gives an optimistic outlook about the auto sector through 2021 and suggests that the recovery in vehicle demand will further pace up in the year. Thus, it is the ripe time to invest in the Zacks Auto, Tires and Trucks sector, which currently flaunts a Zacks Sector Rank of 1. This, in turn, places it at the top 7% of the 16 Zacks sectors.
4 Auto Stocks Set to Dazzle Next Year
Amid this upbeat scenario, we have handpicked four auto stocks, which are set to perform well in 2021 and backed by a Zacks Rank #1 (Strong Buy) or 2 (Buy). These stocks have gained more than 20% so far this year and are witnessing positive revisions, of late.
Tesla TSLA: The red-hot electric vehicle (EV) maker, Tesla, has evolved into a dynamic technology innovator. It has transformed the EV market much the same way as Amazon changed the retail landscape and Netflix revolutionized entertainment. Although EVs occupy a small portion of the global automobile market, Tesla has acquired a substantial market share within this niche segment. With the Model 3 sedan being its flagship vehicle, Tesla has established itself as a leader in the EV segment. Along with Model 3, Model Y is also set to boost Tesla’s prospects, going forward. Along with increasing automotive revenues, the firm’s energy generation and storage revenues are boosting Tesla’s prospects. The auto bigwig made its debut on the prestigious S&P 500 Index recently, achieving another historic milestone.
The company currently flaunts a Zacks Rank #1. The Zacks Consensus Estimate for next year’s earnings is pinned at $3.56 per share, having moved up 7 cents in the past 60 days. The consensus mark suggests a year-over-year rise of 58.85%. The stock has been on fire of late, skyrocketing 672.1% in the year-to-date period.
Magna International MGA: Magna is one of the most diversified automotive parts suppliers in the world. Its broad range of products and services offers the firm a competitive edge. Magna stands to benefit from key emerging trends, including electrification and autonomous driving. Magna’s buyout of Hongli, which is expected to close in early 2021, will solidify its competitiveness in seating through additional manufacturing sites and increased vertical integration. The auto supplier’s investments in the self-driving firm, Waymo, and electric vehicle maker, Fisker, showcases its commitment to meet future mobility needs. The healthy balance sheet of the firm with low leverage and high liquidity bodes well.
The Zacks Consensus Estimate for next year’s earnings is currently pegged at $5.84, suggesting a year-over-year hike of 99.8%, having witnessed northbound revision of 92 cents over the past 60 days. This Zacks Rank #1 stock has appreciated 32% so far this year.
Cummins Inc CMI: Cummins is a leading global designer, manufacturer, and distributor of diesel and natural gas engines and powertrain-related component products. The Columbus-based company has a diversified global footprint and its commitment to moving toward a carbon-neutral future is commendable. Cummins’ continued efforts and investments to ramp up its capabilities in fuel cell and hydrogen production technology bode well for long-term prospects. In fact, the acquisition of Hydrogenic Corp will boost Cummins’ ability to innovate hydrogen fuel-cell technologies across commercial markets that will spur demand for its products in the days to come. Its efforts to maintain a strong balance sheet with low leverage and high liquidity will also stoke growth.
The company currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2021 earnings has been revised upward $1.56 in 60 days’ time to $13.48 per share, indicating year-over-year growth of 18.5%. Its shares have gained 25.3% in the year-to-date period.
Adient PLC ADNT: Adient is one of the world’s largest automotive seating suppliers. Created after the separation of the automotive seating and interiors business of Johnson Controls International PLC, Adient now maintains relationships with the largest global auto manufacturers. The company’s technologies extend to virtually every area of automotive seating solutions. A diverse customer base and regional presence helped the company create a strong market position. The company’s fiscal 2021 guidance underscores notable earnings growth, driven by recovering industry volumes and a positive backlog of new businesses. In addition, the focus on cost discipline is likely to offer some respite to the firm amid the coronavirus-induced financial crisis and drive margins.
Shares of this Zacks Rank #2 company have appreciated 64.7% year to date. The Zacks Consensus Estimate for 2021 earnings has been revised 41 cents upward in 60 days’ time to $3.86 per share, suggesting a year-on-year increase of 27.9%.