Within the auto industry there are a variety of types of companies: auto manufacturers, car dealerships, auto parts and service companies, etc. Many of these companies have seen their stock prices surge in the past year and there’s no reason to think that this momentum should slow down in 2021. Especially because the automotive industry is beginning to go through a massive transformation. Two emerging trends, electric vehicles and autonomous driving, have already begun to revolutionize the auto industry. In the not too distant future, it’s predicted that the majority of vehicles sold will be powered by electricity, rather than internal combustion engines (ICE), and will not require a driver to operate them.
Due to the demand for this new technology and the “return to normal” after the coronavirus pandemic subsides, now could be a great time to invest in the auto industry. In this article we evaluate 5 companies that we think stand to outperform in 2021: Honda Motor Company Ltd. (HMC – Get Rating), Winnebago Industries Inc. (WGO – Get Rating), AutoZone Inc. (AZO – Get Rating), Magna International Inc. (MGA – Get Rating), and AutoNation Inc. (AN – Get Rating).
Let’s take a look at the auto industry before we analyze these 5 stocks:
History of the Automotive Industry
While the automotive industry officially started near the end of the 19th century, it didn’t take off until Ford (F) created the first Model T in 1913. The car was manufactured on an assembly line, which was considered groundbreaking technology at that time. It made cars more affordable for consumers while allowing the company to increase its production daily.
Since then, the industry has seen the number of automakers explode with car companies all over the world. Regular cars were joined by trucks, SUVs, and campers. Traveling became more accessible, and cities grew larger due to the automobile. Before the computer, no invention shaped life more than the automobile. Now the automotive industry includes not only auto manufactures but also auto parts companies and auto dealers.
Plus, other industries depend on cars for sales. For instance, energy companies produce oil for cars, and almost every industry relies on trucks to get their products from suppliers to stores. There are approximately 1.5 billion cars globally, and that number is expected to grow to $3 billion by 2050.
Electric Vehicles and Autonomous Driving
While the assembly line revolutionized auto manufacturing over a century ago, electric vehicles and autonomous driving are poised to revolutionize the industry in this century. As cars have become a massive part of our lives and an integral part of our economy, they have also done significant damage to the planet by adding billions of tons of carbon into the atmosphere.
In fact, close to one-third of all greenhouse gases are caused by transportation. Also troubling is that over 1 million people die per year from car accidents. This has led automakers to innovate with electric cars and autonomous driving. So far, Tesla (TSLA) has been the leader in the race for electric cars and autonomous, and there’s no denying its stock has soared due to the enthusiasm of its future.
Now, virtually all automakers are making investments in these technologies. Some of the world’s biggest automakers, such as General Motors (G.M.) and Volkswagen (VWAGY), are gearing up to release their own lineups of electric cars to stay competitive in what looks like an electric future.
Economics of the Auto Industry
Automotive stocks tend to be cyclical, which means that consumers typically buy less of a product or service if they’re worried about the company. So, when the economy is declining, there are typically fewer people buying cars. This leads to lower profits for car companies and usually lower stock prices. This was certainly the case last year when companies were hit hard by the pandemic.
Most factories were shut down at some point last year, and many dealers ran short of some models. This initially led to lower stock prices, but electric car companies, such as TSLA and several smaller E.V. start-ups, saw their shares soar later in the year due to electric vehicles’ enthusiasm.
The automotive industry outlook looks good this year as car sales are expected to see a sharp recovery in China, Europe, and the U.S., compared to the sluggish sales in 2020. The sales of more inexpensive used vehicles are expected to be especially strong. Plus, aftermarket retailers are benefiting from a maintenance demand due to the recent trend in used car purchases.
An improving economy, stimulus payments, and improving employment levels should also help sales volumes. While the industry’s outlook looks positive, there has been one major hiccup: a shortage of chips. The demand for semiconductors skyrocketed last year, especially for P.C.s, leading to a worldwide chip shortage.
The shortage is affecting many industries, but particularly automobiles. Auto manufacturers need chips to create cars, so some of the world’s biggest car companies have indicated that they plan on cutting production. The good news is that President Biden’s administration has gotten involved and is working to shore up crucial supply chain items.
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