The latest ISM manufacturing PMI index suggests that the turning point for the automotive stock sector is imminent. According to the report, a member of the primary metals industry was quoted as saying that "automotive builds continue at averages but not near maximum outputs." This could translate to there being a long runway for the industry to catch up.
This sector is home to large household names like CarMax Inc. (NYSE: KMX) and Ford Motor (NYSE: F). However, playing the value chain is often a better way to express a view for an industry, which is why original equipment manufacturers (OEMs) and other parts makers could be a more attractive growth strategy.
To ride this wave, investors could consider companies like Visteon Co. (NASDAQ: VC), Driven Brands Holdings Inc. (NASDAQ: DRVN), and LCI Industries (NYSE: LCII) as analysts are projecting double-digit earnings per share (EPS) growth.
More Tailwinds Than Meet the Eye
The U.S. economy is now at a diverging pivotal point propelled by the two most important sectors that drive gross domestic product (GDP) growth: services and manufacturing.
According to the ISM Services PMI index, the services sector has been responsible for driving economic growth for over a year and a half, but that changes today. After contracting for nearly 18 months, the manufacturing sector expanded in March and then again in April. Analysts at Goldman Sachs think further — and sustained — expansion will follow in 2024.
Because of this, the prices of steel and aluminum (the main components in OEMs) rose last month. Steel prices rallied from $3,330 to $3,600 in April alone, a near 10% increase that indicates growing demand for these commodities, likely spurred by automotive demand.
With the Federal Reserve (the Fed) looking to cut rates this year, financing a new car could become more accessible for consumers, so these manufacturers are stocking up on the raw material needed to meet this potential future demand.
3 Stocks That Could Rally
How can investors know if it’s not too late to enter this wave? Price action is a great place to start. Aside from price action, investors can gauge the market’s sentiment regarding EPS projections by comparing current forward P/E valuations against peers. Investors should look for a premium valuation, as stocks typically trade at more expensive multiples for a good reason.
All three of these stocks trade below 80% of their 52-week high, which fits the Wall Street definition of a bear market: a 20% or more retracement from recent highs. Knowing this, analysts feel a lot more comfortable making bold predictions, as the upside gaps to be filled are more prominent now.
1. Visteon
Visteon analysts think the stock’s EPS could grow by 23.8% this year, above the automotive industry’s average expected 16%. Because of this projected outperformance, analysts at JPMorgan Chase decided to value the stock at $145 a share, or 25% higher than today’s prices.
Visteon stock trades at a forward P/E ratio of 11x over the industry’s average valuation of 10x. While only a 10% premium, the market is still justifying the stock’s EPS growth projections and price targets.
2. Driven Brands
Driven Brands analysts see up to 30.7% EPS growth in the next 12 months, again beating the industry’s 16% average. Showing double-digit growth during an uncertain economic cycle, price targets reflect this added premium. Driven Brands could rally by 55.5% according to its $17.9 a share target.
Driven Brands becomes an outlier through its 12.5x valuation, bringing a 25% premium to boost future sentiment toward these projections and price targets.
3. LCI Industries
LCI Industries will beat the industry again this year with its 26.6% EPS growth projections. Unlike its peers, today’s price targets actually reflect a single-digit downside. However, the stock’s 90% institutional ownership would give investors another leg to stand on. Among these institutional owners, Vanguard and PNC Financial Services decided to boost their stakes in LCI by 0.4% and 2.1%, respectively, in the past quarter.
Of these three stocks, the valuation leader is LCI Industries, whose 15x valuation calls for up to 50% premium to its peers.
The Market’s Take
Trading so low relative to their 52-week highs and still commanding premium valuations based on future projections, these stocks could fit the profile for investors looking for double-digit growth in one of the industries that may provide stability during uncertain economic times that could come for the second half of the year.
