Auto stocks are beaten down this year.
A combination of declining global auto sales, difficult year-over-year comparisons and rising commodity costs made the second-quarter earnings season a difficult one for the auto industry. Bank of America analyst John Murphy says performance from auto dealers was relatively strong, while manufacturers reported mixed results and suppliers had a downright awful quarter. Murphy says there are few bullish positive catalysts ahead in the auto industry in the second half of the year, but there are a handful of buying opportunities among the beaten-down auto stocks. Here are nine auto stocks to buy, according to Bank of America.
Asbury Automotive Group (ticker: ABG)
Asbury is a Fortune 500 U.S. auto dealership operator that beat same-store sales expectations in the second quarter, Murphy says. Asbury’s finance and insurance same-store sales were a bright spot in the second quarter, up 7%. Parts and service same-store sales were also up 8%, far exceeding Bank of America’s expectations and helping maintain 16.4% gross margin. These two segments made up for lackluster 1% used vehicle same-store sales and flat new vehicle sales. Bank of America has a “buy” rating and $95 price target for ABG stock.
AutoNation is the largest U.S. auto dealership group in the U.S. Murphy raised his 2019, 2020 and 2021 earnings per share forecast for AutoNation following its second-quarter earnings beat. Murphy says AutoNation’s U.S. standalone used vehicle store initiative is starting to gain some traction given its five existing stores broke even for the first time in the second quarter. Partnerships with Alphabet (GOOGL, GOOG) autonomous vehicle subsidiary Waymo and online auto sales leader Vroom provide exposure to high-growth markets. Bank of America has a “buy” rating and $58 target for AN stock.
Aptiv is a direct supplier to auto manufacturers. Murphy says Aptiv exceeded expectations in the second quarter due to stellar execution and cost efficiencies. Aptiv’s strong quarter was particularly impressive given the number of suppliers that reported declining profits, missed consensus expectations and/or cut guidance in the second quarter. Not only is Aptiv navigating the cyclical auto market downturn, Murphy says it is well-positioned to capitalize on secular auto market growth trends such as electrification, automation and connectivity. Bank of America has a “buy” rating and $92 price target for APTV stock.
Ford Motor Co. (F)
Ford reported a mixed second quarter, including a modest EPS miss. However, Murphy says Ford is finally starting to turn the corner on earnings growth. Ford has streamlined its vehicle model lineup, invested in electrification and automation initiatives and restructured its business. Murphy says Ford will continue to win over the market in the next couple of years with its improved execution and communication, opening the door for potential earnings multiple expansion. Ford stock currently trades at just 6.6 times forward earnings. Bank of America has a “buy” rating and $13 price target for F stock.
General Motors Co. (GM)
Murphy says he has admittedly been skeptical of full-year guidance from General Motors. However, GM reported an earnings beat in the second quarter and reiterated its 2019 EPS guidance of between $6.50 and $7. Murphy says GM management has aggressively addressed underperforming segments, including exiting its European business and restructuring its operations in Korea and China. He says Cruise is one of the early leaders in AV technology, and GM’s cash flow and resources should give it an advantage in next-generation auto tech. Bank of America has a “buy” rating and $55 price target for GM stock.
Kar Auction Services (KAR)
Kar is the second-largest whole car auction company in North America, holding about a 30% market share. It’s also a leader in used car financing. In the second quarter, the company’s auction business revenue grew 18%, including a 7% increase in revenue per vehicle. Murphy says the segment’s earnings miss was largely due to higher-than-anticipated growth expenses. It’s financing division reported 2% revenue growth thanks in part to a 1% increase in revenue per loan transaction. Bank of America has a “buy” rating and $32 price target for KAR stock.
CarMax is one of the largest U.S. used vehicle retailers and auto stocks. Murphy says CarMax’s transition from a traditional brick-and-mortar retail model to an omni-channel model will increase the company’s addressable market, optimize throughput and improve cost efficiencies. Murphy expects a record number of off-lease and trade-in vehicles will return to the used vehicle market in 2019 and beyond, a trend which will boost same-store sales and used vehicle churn. New store openings and omni-channel expansion should help grow margins and profits over time. Bank of America has a “buy” rating and $150 target for KMX stock.
Magna International (MGA)
Magna is a Toronto-based auto supplier that produces interiors, engine parts, metal stampings, trim, mirrors, electronics, sunroofs and other parts for global manufacturers. Murphy says Magna’s mixed second quarter was “good enough” relative to broad weakness among auto suppliers. Magna’s body exteriors and structures segment revenue was own 6.8% in the second quarter, but complete vehicles segment revenue was up 40.8%. He says Magna remains one of the best-positioned suppliers to navigate the difficult near-term auto market slump. Bank of America has a “buy” rating and $60 price target for MGA stock.
Ferrari is one of the most recognizable luxury vehicle designers and manufacturers in the world. Shipments were up 8.4% in the second quarter, including better-than-expected numbers out of China and Europe, the Middle East and Africa. Murphy says China sales were boosted by imminent new emission regulations, while the Portofino model improved U.S. sales. Ferrari reiterated its 2019 financial guidance, which Murphy says is “realistically conservative.” Bank of America has a “buy” rating and $225 price target for RACE stock.
Best auto stocks to buy in a challenging market:
— Asbury Automotive Group (ABG)
— AutoNation (AN)
— Aptiv (APTV)
— Ford Motor Co. (F)
— General Motors Co. (GM)
— Kar Auction Services (KAR)
— CarMax (KMX)
— Magna International (MGA)
— Ferrari (RACE)
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