Here are Morningstar’s top auto stock picks.
The health crisis has weighed on the auto industry and auto stocks in 2020, and it may take the industry years to recover to pre-crisis levels. Global new vehicle sales dropped more than 25% year over year in the first half of 2020, and data and analytics company GlobalData estimates worldwide auto demand may not fully recover to 2019 levels until 2023. Fortunately for long-term investors, the market disruption has created plenty of buying opportunities in the auto space as the industry transitions to a technology-centric and environmentally friendly future. Here are the Morningstar analyst team’s seven favorite large-cap auto stocks to buy.
BMW (ticker: BMWYY)
BMW, the German luxury automaker and owner of the Rolls-Royce brand, has an attractive valuation despite heavy spending on electrifying its portfolio, analyst Richard Hilgert says. Rising middle and upper-middle classes in emerging-market economies around the world will create new opportunities for BMW, Hilgert says. BMW’s brand strength has allowed it to maintain pricing power and superior margins compared with many of its mass-market peers. In addition, BMW plans to have 25 electrified models on the market by 2023. Morningstar has a “buy” rating and $47 fair value estimate for BMWYY stock.
Daimler is another German automaker and owner of Mercedes-Benz. Hilgert is bullish on the company’s long-term strategy, which involves cutting costs and investing in transitioning half of its global vehicles sales to electric vehicles by 2030. This “Electric First” initiative includes the planned launch of six new electric vehicle models. Hilgert says premium brands like Mercedes-Benz are relatively insulated from cyclical auto market downturns. Global population growth of high-net-worth consumers has averaged 5% annually, a trend that Hilgert says will benefit Daimler in years ahead. Morningstar has a “buy” rating and $88 fair value estimate for DDAIF stock.
Fiat Chrysler Automobiles (FCAU)
Fiat Chrysler is an automaker that owns Dodge, Jeep, Ram Trucks and other popular brands. Last year, Fiat Chrysler announced a merger with Peugeot (PUGOY) to create Stellantis, the world’s fourth-largest automaker. The merger deal is expected to close in the first quarter of 2021. Assuming the deal closes as planned, Hilgert values future shares of Stellantis at around $21, suggesting significant upside for Fiat Chrysler’s standalone shares. He is projecting a 21% drop in revenue in 2020 followed by a 5% revenue rebound in 2021. Morningstar has a “buy” rating and $34 fair value estimate for FCAU stock.
General Motors (GM)
General Motors is the largest American automaker. Analyst David Whiston says GM’s third-quarter seasonally adjusted annual sales rate of 15.9 million units is about 4 million units higher than its second-quarter sales rate, suggesting significant improvement in the second half of the year. Whiston is bullish on GM’s heavy investment in autonomous vehicle technology unit GM Cruise and data-gathering capabilities via its OnStar system. California just granted Cruise permission to test fully autonomous vehicles with no human backup drivers on public roads in San Francisco. Morningstar has a “buy” rating and $50 fair value estimate for GM stock.
Honda Motor Co. (HMC)
Honda Motor is one of Japan’s “big three” automakers. Whiston says low steel prices are a tailwind for Honda, but low gas prices have been a headwind due to the company’s lack of SUV and truck models. In early September, Honda and GM announced a new strategic alliance in North America. Whiston says Honda could benefit from the partnership given GM’s expertise in trucks and SUVs. In fact, Honda recently revealed a new electric SUV in China. Honda could also potentially use GM’s Ultium battery and OnStar system. Morningstar has a “buy” rating and $30 fair value estimate for Honda.
Magna International (MGA)
Unlike the other six stocks on this list, Magna is an auto supplier rather than a manufacturer. Magna has taken a big hit in 2020 due to the auto market downturn, but Hilgert says the stock is “attractively valued for patient, long-term investors.” While many other auto sector companies have scrapped 2020 financial guidance, Magna has reinstated full-year guidance, providing some clarity for investors. Hilgert is projecting a 24.7% drop in revenue in 2020 but is forecasting 3% average annual revenue growth in 2021 and beyond. Morningstar has a “buy” rating and $63 fair value estimate for MGA stock.
Nissan Motor Co. (NSANY)
Nissan Motor is Japan’s second-largest automaker. Hilgert says Nissan has been attempting to refocus its business, ditching its previous strategy of gaining market share at all costs and instead prioritizing margins. While the 2020 economic downturn has temporarily disrupted those efforts, Hilgert says Nissan shares are still significantly undervalued. In 2020 alone, Nissan has launched the Kicks e-Power model and new Rogue and Sentra models. Hilgert says Nissan will emerge from the economic downturn as a leaner operation and will benefit from its cross-ownership alliance with Renault. Morningstar has a “buy” rating and $28 fair value estimate for NSANY stock.
Morningstar’s recommended large-cap auto stocks:
— BMW (BMWYY)
— Daimler (DDAIF)
— Fiat Chrysler Automobiles (FCAU)
— General Motors (GM)
— Honda Motor Co. (HMC)
— Magna International (MGA)
— Nissan Motor Co. (NSANY)
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7 Large-Cap Auto Stocks That Morningstar Recommends originally appeared on usnews.com