The global automotive sector appears to be caught in a perfect storm. The industry has been generating a spate of stock moving headlines including emission scandals, financial wrongdoing, the global pivot to EVs and restructuring. Compounding this is the less than cheery forecast by ratings firm Moody’s that recently cut global auto industry outlook from stable to negative, and says that global auto sales are likely to continue to weaken in the first half of 2019, before picking up pace in the second half of the year.
Amidst fears of no-deal Brexit and U.S.-China trade spat, the current U.S. demand has plateaued out. However, despite not growing meaningfully, U.S. sales levels remain strong, argues a Morningstar report, adding that while the demand in major markets may soften moderately, it will remain healthy provided there aren’t any major macroeconomic setbacks. “These insights lead us to conclude that automotive companies may potentially generate solid profits and returns for investors,” the report says.
Expectedly, the leading carmakers are steadily taking measures to better prepare for the changing automotive landscape and maintain their dominant positions. These measures range from controlling costs by cutting jobs, and shuttering plants to closely aligning their product offerings with changing industry trends and consumer tastes. The current weakness in their stock prices relative to their fair value and long-term prospects provide an attractive buying opportunity, and some margin of safety, for long-term investors with some appetite for short-term volatility, according to Morningstar equity research.
| Bayerische Motoren Werke AG ADR | ||
| Ticker: | BMWYY | |
| Current Yield: | 5.49% | |
| Forward P/E: | 7.23 | |
| Price: | US$23.56 | |
| Fair Value: | US$44 | |
| Fair Value Uncertainty | High | |
| Value: | 46% Discount | |
| Moat: | Narrow | |
| Moat Trend: | Negative | |
| Star Rating: | ***** | |
| Data as of Jun. 07, 2019 | ||
German auto behemoth BMW Group (BMWYY) produces cars, SUVs, motorcycles and provides financial services. With 24 production facilities in 13 countries, BMW sells more than 2 million automobiles and more than 150,000 motorcycles worldwide.
Intellectual property and brand strength that enables premium pricing across its products conspire to create a narrow economic moat for the company, a rare distinction for an automaker. The company stands out amongst peers owing to “global recognition of the BMW Group brands, technological leadership in powertrains, the ability to command premium pricing from consumers that regularly rate its vehicles as one of the best to own, and the ability to consistently generate excess returns,” says a Morningstar equity report.
“Given the aspirational nature inherent in the company’s brands, including BMW cars and motorcycles, Mini, and Rolls-Royce, as well as the growth potential from increasing wealth in developing markets, we believe the company will continue to reward investors with solid returns,” says Morningstar equity analyst Richard Hilgert, who appraises the stock’s fair value to be US$44 per American Depositary Receipt (ADR), and asserts “BMW will maintain one of the highest levels of profitability among global automobile manufacturers.”
| Volkswagen AG ADR | ||
| Ticker: | VWAPY | |
| Current Yield: | 3.37% | |
| Forward P/E: | 5.18 | |
| Price: | US$16.03 | |
| Fair Value: | US$26 | |
| Fair Value Uncertainty | High | |
| Value: | 38% Discount | |
| Moat: | None | |
| Moat Trend: | Negative | |
| Star Rating: | **** | |
| Data as of Jun. 07, 2019 | ||
Another European auto giant, Volkswagen AG (VWAPY) makes passenger cars under the Volkswagen brand and owns premium brands such as Audi, Bentley, Bugatti, Lamborghini, Porsche, and Skoda. The company's also has a financial services segment.
The German carmaker has taken a financial hit following the diesel scandal, expected to plague the firm for several more months, while having to contend with higher spending to launch electrified powertrains. However, “with an enviable portfolio of brands, a bevy of new and redesigned models, leading shares in many of the world’s markets, and a healthy pile of cash [giving it a high degree of financial flexibility], Volkswagen has been able to endure substantial fines and judgments while maintaining spending for new technology vehicle launches,” says a Morningstar equity report.
“Geographically diverse and profitable operations reduce its dependence on domestic volume,” says Hilgert, who puts the stock’s fair value at US$26 per ADR. “As one of the world’s leading volume producers, Volkswagen’s economies of scale from common platforms across a growing number of models enable cost savings unattainable by smaller competitors,” Hilgert points out, noting the automaker’s global sales topped 10 million in 2018, rebounding from emissions crisis.
| Fiat Chrysler Automobiles NV | ||
| Ticker: | FCAU | |
| Current Yield: | 5.47% | |
| Forward P/E: | 5.43 | |
| Price: | US$13.23 | |
| Fair Value: | US$31 | |
| Fair Value Uncertainty | Very High | |
| Value: | 57% Discount | |
| Moat: | None | |
| Moat Trend: | Negative | |
| Star Rating: | ***** | |
| Data as of Jun. 07, 2019 | ||
Maker of passenger vehicles and light trucks, Fiat Chrysler Automobiles (FCAU) sells 5 million vehicles under well-known brands including Alfa Romeo, Chrysler, Dodge, Fiat, Maserati, and Ram. The world’s seventh largest car company also makes automotive parts and industrial robots.
Like its peers, Fiat is moving many levers to adjust to changing industry landscape by streamline operations, cutting costs, expanding to new markets.
“Global expansion of the Jeep, Maserati, and Alfa Romeo brands, as well as further development of the Ram brand, richens the product mix and bolsters operating leverage,” says a Morningstar report, noting the company is already a market leader in Brazil and stands to benefit from a rising middle class in emerging markets.
Fiat may be late to markets like India, China and Russia, but it’s still expected to “participate in the above-industry-average growth in emerging-market and Chinese demand,” asserts Hilgert, who puts the stock’s fair value at US$31, and forecasts annual revenue growth of 2.3% led by Maserati, Alfa Romeo, Jeep, and Ram.
