The automotive industry is a prominent part of every market and economy in the world. Almost every individual has a substantial number of cars on his wishlist and several car brands that he truly admires. Family cars like the 2021 Toyota Camry, the 2021 Chevrolet Tahoe, and the 2021 Toyota RAV4 are a daily sight on the streets. Trucks like the 2021 Ford F-150 are also dominating the streets of the US, thanks to its huge sales.
With so many cars in the limelight of your daily lives, the automotive industry has grabbed the attention of many stock investors. And since the automotive industry is here to stay, interest in automotive stocks will never die for decades to come. This article teaches you the very basics of automotive stocks and how you should invest in them to extract the maximum profit.
What kind of stocks can you find within the automotive industry?
The automotive industry has various aspects from the perspective of an investor. The most important stocks are those related to the automaker, who manufactures various cars, SUVs, trucks, and even electric vehicles in their lineup.
There are also various suppliers associated with an automaker. These suppliers provide them with seats, spark plugs, battery systems for EVs, and electronic systems. Supplier stocks are also a good area for investment. Lastly, there are the auto dealer groups that act as the bridge between the manufacturer and the customer.
There are other types of stocks associated with the automotive industry as well, namely-
- Cyclical stocks- These stocks follow the trend of the economy, and it has its shares of profits and losses as per consumer interest
- Consumer Discretionary Stocks- These types of stocks have a highly cyclical nature and carry equal market risks with them. However, these can reap high rewards as well.
- Retail stocks- This is a core type of consumer discretionary stocks.
- Metal stocks- Automakers buy metal to build the chassis of their cars. You can invest in metal stocks as automakers are always reliant on the metal realm for production.
How do you interpret the value of an automotive stock?
Automobiles are meant to last under the hands of a consumer for more than a year just like a good ol’ washing machine and furniture. Hence, automobiles are a type of durable consumer goods. Thus, automotive stocks are under constant impact of the economic cycle for the long term. Hence before investing in anything, study how the automakers maximize profits and stay relevant to the market in good and bad economic times.
Cyclicity of the auto sales cycle
Automobile stocks and suppliers fall under the cyclical stocks category. This means that their profits may vary as per consumer interest. This is because automakers always have to face fixed costs like factories, toolings, logistics, and labor contracts. They have to make sure everyone gets their share of the pay no matter how many cars are sold. Automakers also have to keep their bread and butter fresh and bring out new products and parts alongside their supplies to ensure a competitive edge in their market.
The profit margin for automakers is low even in rich economic periods. This is because of their high running costs and constant spending. Moreover, in times of a recession, the company’s R&D process is put at risk as the profits fall sharply. Thus, consumers and other businesses postpone buying any new products from the automaker in times of a recession.
Automakers and cash reserves
Today’s automakers keep substantial cash hoards ($20 billion in the minimum) to prepare beforehand a recession hits. This ensures that they bring out fresh products even when profits take a hit. For example, during the 2008-09 recession, most automakers cut down on their future spendings. But Ford Automobiles and Hyundai continued to bring out new products at that time and gained a major share of the market when the dull recession period ended. Automakers also pay cash dividends to their shareholders in times of a recession to keep their presence relevant in the market. They do this by using a part of their cash reserve. However, during the COVID-19 pandemic, both Ford and General Motors refrained from paying any dividends to cut down on costs.
Why automakers need a competitive edge over their rivals
As a rule of thumb, a competitive edge in the market is the key to success for any automaker. Of course, the automaker who keeps his vehicle lineup fresh with brand-new products will gain the highest selling prices and profits. Every automaker today invests generously in future development and new technologies. They include the likes of autonomous driving and electrification.
Electric vehicles- the future of the automotive industry
Electric vehicles remain the most exciting aspect of the automotive industry in recent times. They are touted to replace internal combustion cars over time, thanks to their incredible efficiency, zero emissions, and power in a similar wavelength to the ICE cars. The electric segment is attracting thousands of investors every day, as they are quite new and different from a traditional car.
Investors need to keep in mind that electric car manufacturers face similar running costs as the traditional ones. However, many traditional manufacturers are expanding their portfolio to include EVs. So, expect the electric segment to become a fiercely competitive market as time progresses.
Impact of COVID-19
It is important to consider the effects of COVID-19 on automakers before purchasing any stock. As you know, the majority of car factories shut their door during the lockdown period. Dealers were also running short of any car models to sell. Automakers opened their doors for production by the end of June 2020, albeit with stringent laws and new equipment for workers to protect them from the virus. Of course, sales took a hit because of the reduced workforce and slower production. However, electric manufacturers like Tesla prospered during this period, thanks to their ramped-up manufacturing capacity.
How to decipher a company’s financial statement?
Usually, a company’s financial performance is analyzed by looking at their operating income called EBIT (earnings before interest or tax) or EBIT margins. These are composed of the automaker’s direct manufacturing and shipping costs. EBIT also includes the R&D expenses while excluding any forms of taxes or interest. Understanding EBIT gives you an idea of the automaker’s financial performance.
Automakers also provide information on their one-time charges and gains like write-offs and tax windfalls. Use them to analyze the automaker’s underlying performance.
Finally, automakers also have tie-ups with subsidiaries like finance companies. These companies help to hook up a customer or dealer with a loan or lease. To provide an easier understanding, automakers provide automotive or industrial numbers, which are related to their debt and cash flow figures. Investors can make out the company’s debt through these figures.
Best automotive stocks to buy in 2021
Tesla (NASDAQ: TSLA)
Elon Musk’s wonder electric automotive giant is taking a huge step to becoming the world’s largest automaker by market cap. Its presence in the global automotive scene is increasing day by day. With Tesla bagging a huge number of US and global sales, it is a ripe time for investors to buy Tesla stocks.
Ferrari NV (NYSE: RACE)
Ferrari’s great racing presence and its high-end lineup of expensive cars are renowned all over the world. The brand is an influential presence in the market with its long waiting list of customers and extravagant profit margins.
Volkswagen (OTC: VWAGY)
Home to famous brands like Audi, Porsche, Bentley, and Bugatti, Volkswagen is one of the largest automotive manufacturers and is one of the best-selling non-US brands. Volkswagen is expanding its portfolio to include EVs in its lineup. Thus, currently, there is a huge spike in shares related to Volkswagen.
Ford Motor Company (NYSE: F)
Ford’s everlasting presence in its home country US and the global marketplace is well-known to every investor. Ford’s F-Series pickup trucks are the best-selling cars in the States for quite a long time now. Ford is also diverting some of its attention towards the electric segment lately and has expanded its global operations.
The automotive industry is a rapidly changing one, thanks to the introduction of electric cars and other futuristic technologies. Buying automotive stocks is a great move to expand your investment portfolio. Automotive stocks are great indicators of the changing trends of the economy. These stocks may help you to predict an economic slump or rise beforehand, so you can plan your other investments accordingly. Besides, our website at carindigo.com will always help you keep track of the current consumer confidence in the automotive industry.