5 automaker stocks that are undervalued

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Auto manufacturing inventories are now at even more attractive levels after being undervalued for the past 10 years. But has the market been too punitive towards the industry?

The Morningstar Global Auto Manufacturers Index has fallen 19% this year, and while these stocks have been grossly undervalued, recent prices peg the group at an average 37% discount to their fair value estimates. That’s still cheaper than the average 20% discount for the band seen over the past decade. This includes names such as Nissan (NSANY)BMW (BMWYY)and General Motors (GM).

Fears about inflation, a possible recession, rising interest rates and chip shortages are driving much of the downward pressure on these stocks’ prices, the strategist said. from Morningstar David Whiston in a recent report.

The good news is that, despite all of this, “we’re still seeing millions of units of pent-up demand today,” Whiston says.

“Kilometers driven this year have for some months exceeded pre-pandemic levels, unemployment looks good and credit is reasonably available, so we see no reason to think auto demand will collapse over the next few years,” said Whiston. Even if the United States enters a recession, Whiston believes sales will rise from current levels if companies have the capacity to build new cars.

Of the 12 U.S.-listed automakers covered by Morningstar analysts, nine are undervalued. The other three, Tesla (TSLA)Li-Auto (LI)and Toyota (MC), are trading within a range considered to be fairly valued. Of the undervalued stocks, five have a 5-star Morningstar rating.

The 5 Most Undervalued Automaker Stocks

  1. Nissan engine (NSANY)
  2. Stellantide (STLA)
  3. volkswagen (VWAPY) (VWAGY)
  4. BMW (BMWYY)
  5. General Engines (GM)

The highest inflation rate in decades has forced consumers to cut costs and limit spending. Rising interest rates also drive up borrowing costs for those who need to finance the purchase of a new vehicle, further limiting sales. Concerns about a possible recession also dampened expectations for the cyclical industry, with investors expecting a slowdown to reduce demand.

However, what has kept manufacturers from meeting this demand and operating at full capacity is the continued shortage of chips.

“Lack of inventory remains the primary issue preventing auto sales from a full pandemic recovery,” Whiston said. “No one from the management teams in our automotive coverage is saying the chip shortage will end this year, but the consensus is that there will be significant improvement in the second half of 2022.”

And industry inventory levels have improved to about 1.2 million in the United States from 973,000 in September, according to Wards Intelligence. However, Whiston still sees inventory levels of about 2 million vehicles below where they should be, even after taking into account automakers’ plans to reduce inventory from pre-pandemic levels, which exceeded historically 4 million.

Even in a recession, Whiston still sees growth in auto sales, noting that if total sales per capita of the U.S. population fell to the levels seen in the recessions of 1980 and 1991, the industry would sell between 16.2 million and 16.4 million units.

“Given the low volume, we think any automaker, auto supplier or dealership CEO would be thrilled to see sales of 16.4 million,” Whiston said. “This math leads us to say something that we will probably never say at any other time: a recession combined with the end or end of the chip shortage could mean that auto sales will rise in a recession.” Here are the automaker stocks offering the best value right now:

Nissan engine

  • (NSANY)
  • Morningstar Moat Rating: None
  • Estimated fair value: $22
  • Discount: 65%

“We believe that the current unfavorable operating environment has masked the progress of the turnaround. Headwinds include war in Ukraine, chip shortages, COVID-19 lockdowns in China, and higher costs of raw materials, “Energy, logistics and other inflationary pressures. Even so, we think Nissan is emerging on the other side of its turnaround as a leaner organization, working more closely with alliance partner Renault.”

“For long-term investors expecting a turnaround, we believe the stocks offer attractive value.”

Richard Hilgert, Senior Equity Analyst

Stellantide

  • (STLA)
  • Morningstar Moat Rating: None
  • Estimated fair value: $36
  • Discount: 62%

“If recent history is any indication, the Peugeot Group and Fiat Chrysler combined under the leadership of Carlos Tavares have the potential to achieve synergy targets well ahead of management’s four-year 80% target.

“Management maintained its guidance for 2022 despite the Ukraine crisis, the weakening US economy and the lingering effects of the chip crisis. The company expects a double-digit capex margin and positive free cash flow. Due to better than expected pricing and cost reduction measures in the first half results, we have increased our AOI margin estimates for 2022 and 2023 to 13% from 10% and 11.5% from 9.5% , respectively. “

Richard Hilgert, Senior Equity Analyst

volkswagen

  • (VWAPY)/(VWAGY)
  • Morningstar Moat Rating: None
  • Estimated fair value: $36
  • Discount: VWAPY 60%, VWAGY 48%

“Volkswagen’s modular electric drive matrix platform underpins its current battery electric vehicle offensive. By the end of 2022, the company plans to have 27 MEB-derived BEV models. In 2023, Volkswagen will launch its unified battery cell strategy which targets 80% revenue volume penetration by 2030 and foresees a 50% reduction in the cost of entry-level segment battery cells as well as savings of 30% in the volume segment. By 2025, Volkswagen expects the BEV to account for 20% of global sales.”

“We appreciate that Volkswagen has continued with its common architecture manufacturing strategy. We believe that the strategy, which increases economies of scale, will continue to reduce costs. However, the common architecture MEB strategy poses a risk if consumer demand for BEVs does not materialize. Volkswagen is targeting an adjusted EBIT margin of 7% to 8% in 2025, up from its historical 15-year median of 6.0%.

Richard Hilgert, Senior Equity Analyst

BMW

  • (BMWYY)
  • Morningstar Moat Rating: Narrow
  • Estimated fair value: $51
  • Discount: 52%

“BMW continues to outperform the broader auto market despite the global economic uncertainties related to the coronavirus and is one of the few automakers to which we attribute an economic fluke. As consumers in emerging markets get richer, many will buy luxury items for the first time Given the inherent aspirational nature of the company’s brands, including BMW, Mini and Rolls-Royce cars and motorcycles, as well as the growth potential of increasing wealth in the markets developing, we believe the company will continue to reward investors with strong returns.”

Richard Hilgert, Senior Equity Analyst

General Engines

  • (GM)
  • Economy Toggle: None
  • Estimated fair value: $70
  • Discount: 44%

“We believe GM’s earnings potential is excellent because the company has a healthy North American unit and a nearly mature financial arm with GM Financial. The transfer of hourly worker retiree health care to a separate fund and plant closures have significantly lowered GM North America’s break-even point for U.S. manufacturing sales of approximately 10-11 million vehicles, assuming an 18%-19% share.”

David Whiston, Industry Strategist

A chart showing automaker stock returns.

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