The number of problems caused by Covid-19, and the number of companies and industries affected, are hard to keep track of. After all, no one is shopping or traveling, and, more important, no one is driving.
Automotive shares, much like airline and cruise stocks, have been hit hard. But the coronavirus-induced auto turmoil is creating some opportunities to pick up car stocks at a discount. Two Wall Street analysts have thematic ways to play the sector.
“The miles-driven collapse has a big impact,” Baird analyst David Leiker tells Barron’s. He was talking about Tuesday’s earnings report from
(ticker: SNA), which sells tools to mechanics used to diagnose car problems and execute the repairs. But his comments applied to the broader industry as well.
Snap-On reported a 13% year-over-year drop in earnings per share. Miles driven around the country declined roughly 45% in March—hurting demand for repair services. “The second quarter [is] likely to see a larger decline,” wrote Leiker in a Tuesday research report.
Snap-On shares are down about 33% year to date after dropping another 2.9% Tuesday. Leiker rates Snap-On shares the equivalent of Hold.
Leiker still sees opportunity among car stocks and likes his “best growth” ideas, including
(GNTX). Aptiv and Visteon have exposure to the trends of vehicle sophistication, electrification and autonomous driving. Gentex has “the best business model in the auto supplier space,” according to the analyst. It has 90% market share in key products, as well as a debt-free balance sheet.
That trio trades for about 13.7 times estimated 2021 earnings and is off about 35% year to date.
Guggenheim analyst Ali Faghri is taking a slightly different approach than Leiker. He sees automotive aftermarket stocks heating up as the U.S. economy recovers. The aftermarket is the industry term for everything that happens after a new car is driven off the dealer lot.
The aftermarket players “are defensive and have historically outperformed in recessionary backdrops,” wrote Faghri in a Tuesday research report. “These subsectors should also benefit from a quick normalization in driving trends.”
He recommends the used-car auction stocks
(IAA), as well as salvage company
(LKQ). The three are down about 34% year to date. The auction companies trade for relatively high multiples of earnings. LKQ, on the other hand. trades for about 8 times estimated 2021 estimates.
Faghri also upgraded
Advance Auto Parts
(AAP) Tuesday to the equivalent of Buy. These two auto parts retailers have done better than many other automotive stocks, but are still down 17% and 29% year to date, respectively. They trade for about 19 times and 14 times estimated 2020 earnings, respectively.
The automotive universe is huge. Millions of cars are made annually, fueling thousands of businesses—ranging from parts suppliers to auto manufacturers to ride-sharing companies, including
(LYFT). Share prices for the entire universe are down, very roughly 30% to 40% year to date, worse than the double-digit declines of the
Dow Jones Industrial Average.
But the huge size of the auto universe also means there are a lot of themes to play and stocks to pick from. It can be hard to buy when market fears are high, but investors should, at least, start looking for auto bargains for a post-coronavirus world.
Write to Al Root at firstname.lastname@example.org
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