US Auto Industry Faces Challenges Amidst Declining Sales and Rising Costs

As the third quarter wraps up, the Zacks Domestic Auto industry grapples with a 2% drop in new vehicle sales in the United States. Analysts are predicting further instability due to the impending U.S. presidential election and potential shipment interruptions from dock worker strikes. Automakers are seeing squeezed profit margins from high inventory levels and increasing incentives. Nevertheless, companies like Tesla TSLA, General Motors GM, and Blue Bird Corporation BLBD may be better equipped to weather these challenges.

Understanding the Industry Landscape

The Zacks Domestic Auto industry encompasses firms involved in the design, manufacture, and retail of various vehicles worldwide, including cars, SUVs, trucks, and electric vehicles. This consumer-driven industry employs a significant workforce and stands at the forefront of technological innovation, undergoing a significant transformation. Rapid digitization and modernization are reshaping the automotive market, with many companies pursuing advances in electric and autonomous vehicle technologies.

Current Trends Impacting the Market

Declining Vehicle Sales: According to U.S. Automotive News, new vehicle sales in the U.S. fell about 2% year over year in the third quarter, marking a second straight quarterly decline. Industry insiders anticipate ongoing volatility, influenced by the uncertainty surrounding the upcoming presidential election in November. Additionally, potential strikes at East Coast and Gulf of Mexico ports may disrupt fourth-quarter shipments of imported vehicles. S&P Global Mobility has revised its 2024 U.S. sales forecast downward from 16 million to 15.9 million vehicles, alongside a lowered North American light-vehicle production outlook of 15.5 million units.

Increased Incentives Cutting Into Profits: The inventory of new cars and light trucks soared to 2.8 million vehicles last month, a 40% rise from the previous year. To stimulate sales, automakers have significantly increased incentives, leading to a 63% rise in average discounts per vehicle since September 2023, as reported by J.D. Power and GlobalData. Incentives are expected to account for 6.2% of the sticker price, an increase of 2.4 percentage points from the previous year. Unfortunately, these generous offers could further impact already tight profit margins due to rising production costs.

Rising Labor Costs: The recent wage agreements by the United Automobile Workers (UAW) could lead to wage hikes of up to 60% for new hires, impacting production costs across the industry. General Motors and Ford have projected their expenses to rise by approximately $9 billion over the next four years due to these agreements. While some input costs have declined since their pandemic peaks, substantial wage increases from UAW contracts will likely add pressure on overall costs in 2024, offsetting some savings gained from lower input costs.

Performance Ranking of the Industry

The Zacks Automotive – Domestic industry is part of the broader Zacks Auto-Tires-Trucks sector. Currently, it holds a Zacks Industry Rank #212, placing it in the bottom 15% of 250 Zacks industries. This ranking reflects a lack of near-term prospects for the industry, demonstrated by a negative outlook for aggregate earnings and declining analyst confidence in growth potential.

Despite this uninspiring landscape, we will spotlight a few promising stocks within the industry. First, let’s examine the sector’s price performance and current valuation benchmarks.

Industry Underperforms Compared to Broader Markets

Over the last year, the Domestic Auto industry has underperformed both the Zacks S&P 500 composite and its sector counterparts, experiencing a roughly 17.5% decline compared to the S&P 500’s impressive 33.5% gain. The sector itself has contracted by 14% during the same period.

One-Year Price Performance

Valuation Metrics

Given that many automotive companies carry substantial debt, the industry is often evaluated using the EV/EBITDA (Enterprise Value/Earnings before Interest, Taxes, Depreciation, and Amortization) ratio. Presently, the industry trades at an EV/EBITDA ratio of 26.23X, compared to 19.54X for the S&P 500 and 15.01X for the sector. Historically, the industry has seen this ratio peak at 61.82X and dip to 9.93X, with a median of 24.67X over the past five years.

EV/EBITDA Ratio (Past Five Years)

Three Stocks Worth Watching

Tesla: This electric vehicle leader reported 462,890 vehicle deliveries (including 439,975 Model 3/Y and 22,915 other models) globally in the third quarter, a 4.3% sequential increase. This marks Tesla’s first year-over-year growth in deliveries for 2023. The company anticipates launching new, affordable EV models sooner than previously expected, which is a positive sign. The Energy Generation and Storage segment remains its most profitable area, contributing significantly to its margins. With strong financial standing characterized by high liquidity and low leverage, Tesla is well-positioned to pursue growth opportunities. Moreover, developments in its humanoid robot project (Optimus) and the rollout of Full Self-Driving (FSD) Beta software (V12.5) suggest exciting advancements ahead.

Tesla currently holds a Zacks Rank #2 (Buy). The Zacks Consensus Estimate reflects projected sales growth of 2% in 2024 and 15% in 2025. Although the consensus for TSLA’s 2024 EPS indicates a 27% decline year-over-year, a positive outlook calls for a 35% increase by 2025.

Price & Consensus: TSLA

General Motors and Blue Bird Soar Amid EV Demand in 2024

General Motors (GM): A Leading Force in the Auto Market

General Motors stands as the top-selling automaker in the United States, thanks to strong demand for its popular pickups and SUVs, which are contributing to notable profit growth. The company is on track to meet its ambitious $2 billion cost reduction goal by the end of 2024 and has adequate cash reserves, boasting total automotive liquidity of $35.8 billion as of June 30, 2024. Notably, GM aims to achieve a positive variable profit on its electric vehicles (EVs) by the end of 2024, excluding fixed costs. Following a favorable performance in the first half of the year, GM has updated its 2024 forecasts, generating optimism about its future. The new adjusted EBIT forecast now stands between $13 billion and $15 billion, an increase from the previous estimate of $12.5 billion to $14.5 billion.

Currently, GM holds a Zacks Rank of #3 (Hold). The Zacks Consensus Estimate indicates that the company may see a 3% growth in sales and a 29.3% increase in earnings per share (EPS) for 2024. Impressively, GM has exceeded estimates in each of the previous four quarters, with an average positive surprise of 18.8%.

Price & Consensus: GM

Blue Bird: Trailblazing in Electric School Buses

Blue Bird, a school bus manufacturer with over a century of history, is making strides in the EV sector by expanding its offerings in alternative fuels. The company is poised to take advantage of the growing demand for electric school buses, bolstered by favorable government policies. In addition to battery-electric models, Blue Bird provides gasoline and propane buses, with propane recognized for its ultra-low emissions. The company’s focus on enhancing operations, increasing production efficiency, and securing new orders has led to robust results. Recent quarterly findings showed that Blue Bird outperformed expectations and raised its forecasts for profit and sales for the year. With a backlog of 5,200 units, including nearly 560 electric buses, Blue Bird continues to position itself well within a strong market.

Blue Bird currently holds a Zacks Rank of #3. The Zacks Consensus Estimate for the company’s fiscal 2024 anticipates an 18% growth in sales and an impressive 216% increase in earnings. The company has consistently surpassed expectations over the last four quarters, averaging a 95.5% positive surprise.

Price & Consensus: BLBD

Semiconductor Sector Anticipates Major Growth

Zacks has identified a leading semiconductor stock that is significantly smaller than NVIDIA, which has soared more than 800% since Zacks first recommended it. Despite NVIDIA’s ongoing strength, this new top pick shows considerable potential for growth.

The company’s strong earnings growth, coupled with an expanding customer base, positions it favorably to meet the surging demand in Artificial Intelligence, Machine Learning, and the Internet of Things (IoT). Projections indicate that global semiconductor manufacturing will rise from $452 billion in 2021 to an estimated $803 billion by 2028.

For more insights into potential investments, readers can download information on 5 Stocks Set to Double for free.

Tesla, Inc. (TSLA): Free Stock Analysis Report

General Motors Company (GM): Free Stock Analysis Report

Blue Bird Corporation (BLBD): Free Stock Analysis Report

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