The global automobile sector is witnessing one of the biggest headwinds in the form of the novel coronavirus. It’s expected that global auto sales will decline by 22% in fiscal year 2020, with sales in the U.S. expected to decline by 26.6%. As challenging times sustain, it’s a good opportunity to grab some auto stocks that can deliver value in the long-term.
Moody’s expects that global auto sales will rebound by 11.5% in FY2021. Therefore, as sales trend higher again in the coming quarters, auto stocks will be in limelight.
Let’s look at the factors that make the following four auto stocks worth considering.
Ford Motor Company (F)
In the market meltdown triggered by the novel coronavirus, F stock had touched a low of $3.96. Currently, the stock is higher by 59%. Even after a significant rally, I remain positive on this auto stock.
The first reason to like F stock is the fact that the company ended first quarter of 2020 with a total liquidity buffer of $35.1 billion. A strong cash position will ensure that the company can navigate the current headwinds.
From a growth perspective, I am bullish on Ford’s plans for China. The company has a line-up of electric vehicles for launch in the coming years. Chinese markets can absorb multiple players in the EV market and Ford is likely to make inroads.
In the United States, Ford has already been registering robust sales in the truck segment. Last year, the F-series and Ranger sales totaled one million units. The momentum in pick-ups is likely to sustain and that will help in boosting cash flows.
In Europe, FY2019 was the best in 25 years for commercial vehicle sales. Besides that, SUV sales were also strong.
Overall, Ford can deliver relatively strong sales numbers in the coming years with focus on pick-ups, SUVs, and electric vehicles. This makes F stock attractive even after the recent rally.
Tata Motors (TTM)
Tata Motors is another automobile company that is worth considering for the long-term. In the last year, TTM stock has declined by 40% and I see this as a good buying opportunity.
If there is a single growth driver for Tata Motors worth mentioning, it’s the Jaguar Land Rover business. The segment is the company’s cash flow driver. It’s worth noting that even as automobile sales were weak in China, Jaguar Land Rover sales increased by 24.3% in the last quarter of FY2019.
In addition, as economies re-open after the coronavirus lock-down, Jaguar Land Rover is likely to see renewed growth in U.K, Europe, and the United States. Therefore, it’s likely that the coming quarters will be relatively strong for the company.
It’s also worth noting that Tata Motors is an Indian company. While India’s automobile market is going through a rough patch, the long-term outlook remains positive.
For FY2021, factors like recovery in demand coupled with launch of new models should trigger growth for Tata Motors. Overall, TTM stock is attractive with focus on China and India.
Tesla (TSLA)
Next up on this list of auto stocks is Tesla. As TSLA stock surged above $1,000, there are speculations on the attractiveness of the stock at these levels. However, I believe that any small correction can be used to consider fresh exposure to the stock for further upside in the medium- to long-term.
The first reason to be bullish on Tesla is the company’s cash buffer of $8.1 billion as of Q1 2020. This implies no funding requirement in the foreseeable future.
The second reason to be positive on TSLA stock is the company’s progress on the Europe Gigafactory. With manufacturing locations in the United States, China, and Europe, the company is positioned to cut cost and cater to incremental demand.
From a revenue perspective, the company believes that it has ample capacity to exceed 500,000 deliveries for the year. If this holds true even with the global headwinds, TSLA stock is likely to trend higher.
It’s worth noting that the company’s EBITDA margin has been expanding on a year-on-year basis. This is likely to translate into operating cash flow upside. Once the company is through the investment phase, robust free cash flows will create shareholder value.
Considering these factors and the company’s growth potential in China, I am bullish on TSLA stock even at $1,000. While investors can wait for some correction, the stock is worth keeping in the radar for the core portfolio.
Nio (NIO)
Nio got a life-line when it entered into an investment agreement with “strategic investors” in April 2020. The company has also raised additional funds through a recent offering of American Depository Shares.
With a healthy liquidity buffer and initiatives to reduce cash burn, the company is well positioned to focus on growth. As a matter of fact, the company’s vehicle deliveries for May 2020 increased by 215.5% on a year-on-year basis.
As vehicle deliveries increase, margins are likely to improve. New model launches will continue to support growth. It’s worth noting that China has raised FY2025 sales target for electrified cars. The target is to have 25% of new cars sold as electric vehicles. This leaves immense scope for growth in the Chinese market and Nio stands to benefit.
Nio stock has surged almost 180% in the last six months. However, the rally was from deeply oversold levels when the company was staring at potential bankruptcy. With ample liquidity and strong growth in vehicle deliveries, the rally in Nio stock is likely to continue.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
