Here are eight of Bank of America’s top automotive stocks.
U.S. auto sales dropped 25% year over year in June as the economic downturn continues to weigh on demand for new vehicles. Still, the auto industry is not all doom and gloom these days. The used car market is reportedly heating up, with June used vehicle sales beating pre-pandemic forecasts by 17%, according to J.D. Power. The auto industry is a dangerous place to invest in 2020, but Bank of America analyst John Murphy says there are plenty of long-term buying opportunities among manufacturers, suppliers and dealers. Here are eight of Bank of America’s top auto stocks to buy today.
General Motors Co. (ticker: GM)
General Motors suspended its 6% dividend and drew down $16 billion from its revolving credit facilities earlier this year to ensure that it weathers the downturn. Murphy says GM is taking a financially responsible, long-term approach to transitioning its business to the next era of transportation. He says GM is executing well in its core business and is positioned to roll out 10 electric vehicle models over the next four model years. In addition, recent fundraising values GM’s Cruise autonomous vehicle unit at about $15 billion. Bank of America has a “buy” rating and $45 price target for GM stock.
Ferrari NV (RACE)
Ferrari is one of the most popular global luxury sports-car makers. Given Ferrari’s high-end products, the company has traditionally generated much higher operating margins and returns on invested capital than mass-market automakers. Murphy says Ferrari is well-positioned to grow volume, revenue and earnings through at least 2022 in an extremely difficult auto market. That growth should support a premium valuation for Ferrari stock relative to other automakers. As long as Ferrari protects its valuable brand, the stock should remain in a class of its own. Bank of America has a “buy” rating and $235 price target for RACE stock.
Ford Motor Co. (F)
Shares of U.S. auto giant Ford are down more than 50% in the last five years. However, Ford is investing at least $1 billion in artificial intelligence company Argo AI and partnering with Volkswagen to use its modular electronic toolkit to design electric vehicles. Ford recently unveiled a prototype for a 1,400-horsepower, electric Mustang Mach-E and relaunched its Ford Bronco after a 24-year absence. Murphy says the company is finally getting aggressive with updating its business, and long-term investors should be rewarded for their patience. Bank of America has a “buy” rating and $7 price target for F stock.
Aptiv is a global auto supplier that produces electrical components, entertainment products, safety solutions and other systems. Murphy says Aptiv is not immune from broad auto market pressures. But in the first quarter, the company’s Signal and Power Solutions revenue was down just 9%. Murphy says Aptiv’s liquidity position is strong after the company suspended its dividend earlier this year. While earnings and revenue numbers will likely be pressured in the next couple of quarters, those pressures are already priced into the stock, Murphy says. Bank of America has a “buy” rating and $95 price target for APTV.
Unlike other stocks on this list, shares of used car retailer CarMax have gone higher in 2020, gaining about 33% in the last three months. Murphy says CarMax’s core performance exceeded extremely low expectations last quarter. The company reported a same-store unit sales decline of 41.8% year over year, well above Murphy’s estimate of a 66.6% drop. CarMax’s aggressive digital and omnichannel investments have paid off tremendously during the economic shutdown. If the fragmented used car industry consolidates over time, CarMax could have significant growth opportunities. Bank of America has a “buy” rating and $130 price target for KMX stock.
Magna International (MGA)
Magna is an auto parts supplier that produces a wide range of components, including interiors and engine parts. Murphy says auto supplier stocks will likely see valuations improve, along with a post-crisis rebound in global auto production. In addition to Aptiv, Magna is Murphy’s top long-term auto supplier pick. He’s especially bullish on the company’s proprietary technology, its diversified expertise, its scale and its valuable partnerships with the world’s biggest automakers. He says Magna’s business is well-positioned for the auto market’s technological revolution. Bank of America has a “buy” rating and $70 price target for MGA stock.
BorgWarner is one of the world’s leading producers of powertrain components. Murphy says BorgWarner produces next-generation powertrain products for all segments of the auto market, including legacy internal combustion vehicles, hybrid vehicles and electric vehicles. Management has done a commendable job in transitioning BorgWarner’s core business to become agnostic when it comes to internal combustion versus electric demand, according to Murphy. He says BorgWarner has also been strategic with buyout opportunities, including a $3.3 billion deal for Delphi Technologies (DLPH) earlier this year. Bank of America has a “buy” rating and $50 price target for BWA stock.
Lear Corp. (LEA)
Lear is an auto supplier that specializes in seating and electrical systems. Murphy says Lear’s above-average margins and cash flow suggest it is one of the best-run suppliers within its peer group. Seating and electronic systems margins have been under cyclical pressures in recent years, but Murphy says future risks are already priced in with the stock down about 19% overall in the last three years. At 10.4 times forward earnings, valuation for Lear is attractive and the stock has a significant upside, Murphy says. Bank of America has a “buy” rating and $160 price target for LEA stock.
Automotive-related stocks worth buying:
— General Motors Co. (GM)
— Ferrari NV (RACE)
— Ford Motor Co. (F)
— Aptiv (APTV)
— CarMax (KMX)
— Magna International (MGA)
— BorgWarner (BWA)
— Lear Corp. (LEA)
More from U.S. News