The automotive industry is a massive, highly visible sector, and it consistently captures the attention of investors. Familiar brands and personal opinions about new cars and trucks are commonplace, making automotive stocks a perennial area of interest. This piece offers a closer look at these stocks and provides insights into smart investment strategies.
Top Automotive Stocks
Here are some well-known automotive stocks which are key players to watch:
-
Ford Motor Company (NYSE:F): Ford is a long-standing leader in the pickup truck and commercial vehicle markets, with worldwide operations. The company is now investing in electric and automated vehicles. High interest rates, however, have slowed EV growth recently.
-
Ferrari NV (NYSE:RACE): This Italian automaker is known for its luxury sports cars and racing heritage. Ferrari’s distinctive brand generates strong pricing power and premium profit margins, which are sustained by lengthy waiting lists.
-
Tesla (NASDAQ:TSLA): Tesla, a pioneer in the “premium electric vehicles” market, has grown to become the most profitable EV automaker globally, dominating the U.S. EV market. Investors have high expectations for CEO Elon Musk’s vision, including ongoing EV sales, robotaxis, and Full Self-Driving (FSD) technology.
-
Stellantis (NYSE:STLA): Formed in 2021 through the merger of Fiat Chrysler and Peugeot, Stellantis’s diverse brand portfolio includes Jeep, Ram, Dodge, Opel, Vauxhall, Peugeot, Fiat, Alfa Romeo, and Maserati. The company has strong global footprints in Europe and South America, alongside robust operations in the U.S.
-
Volkswagen (OTC:VWAGY): Volkswagen is one of the best-selling automakers outside the U.S. Its portfolio includes VW, Skoda, SEAT, along with the Audi, Lamborghini, Porsche, and Bentley luxury brands.
-
Toyota Motor (NYSE:TM): Established in 1937, Toyota’s global brand portfolio includes, Toyota, Lexus, Daihatsu, and Hino brands and has grown to be the largest car brand globally by sales.
-
General Motors (NYSE:GM): Owners of the GMC, Buick, Chevrolet, and Cadillac brands, GM is the largest car company in the U.S. by sales volume.
Understanding the Automotive Industry
The automotive industry encompasses several different types of stocks:
- Automakers: Companies that manufacture cars, trucks, sport utility vehicles, and electric vehicles (EVs).
- Auto Parts Suppliers: Businesses that produce a range of parts, from seats and spark plugs to complex electronic systems, tires, and EV batteries.
- Auto Dealer Groups: Companies that own and operate automobile dealerships.
- Auto Parts Retailers: Companies that sell replacement parts directly to consumers.
Evaluating an Automotive Stock
Automotive stocks are part of the consumer durables sector and are impacted by economic cycles.
The Auto Sales Cycle
Automakers and their suppliers are cyclical stocks, meaning that profitability is tied to consumer confidence. When consumer confidence wanes, vehicle sales are often postponed. This cyclicality matters to investors because:
- Automakers have high fixed costs, including factories, tooling, logistics networks, and labor contracts, payments which must be made regardless of sales volume.
- Investment in research and development is required for continued product innovation.
Low-profit margins are common in the automotive industry. When sales decline, profits diminish rapidly, potentially putting a strain on future product innovation and competitiveness.
Companies can mitigate exposure to the cyclical nature of the market by investing in stocks in the aftermarket (auto parts) and replacement segment of the industry.
Cash Reserves and Financial Statements
During the 2008-09 recession, many automotive companies cut product spending. Companies like Ford and Hyundai, that maintained product innovation, were able to gain increasing market share when the economy recovered. Now, most global automotive companies maintain substantial cash reserves so they can continue investing to develop new products through recessions.
Many companies provide adjusted figures that exclude the impact of one-time charges and gains. Automotive finance businesses can make financial statements complicated, so most automakers provide debt and cash flow figures specific to their core automaking businesses to improve clarity and ease comparisons.
Competition in the Car Industry
Competition in the car industry is intense. The automakers that continue to innovate and introduce new products are generally more successful. Most companies are increasing investments in future technologies such as EVs, safety features, and autonomous driving systems.
Electric Vehicles
Electric and hybrid electric vehicles have substantial growth potential, but the processes of EV manufacturing are not that different from the internal combustion engine. EV manufacturers face the same high costs as traditional automakers. The competition in the EV market is fierce, and the main focus over the last year has been cutting costs where necessary.
Are Automotive Stocks Right For You?
Automotive stocks can be a valuable component of a diversified portfolio, and, because they are tied to consumer confidence, can offer insights into the broader economy. Additionally, investors can take a positive view on a company’s long-term hybrid and EV strategy.
