Last year, U.S. auto sales fell to a decade low amid severe supply chain snarls and tight inventories. But vehicle sales are off to a decent start this year. Cox Automotive expects U.S. auto sales to have grown around 6% year over year in the first quarter of 2023. Despite economic uncertainties, demand for vehicles seems to have held its ground. Through the three months ended March 2023, the seasonally adjusted annual rate (SAAR) is forecast at 15 million units, an increase from 14.1 million SAAR in the corresponding period of 2022.
The Zacks Auto-Tires-Trucks sector rose 21.7% in the first quarter of 2023, much higher than the S&P 500’s return of 7.4%.
With the help of the Zacks Stock Screener, we have shortlisted four auto stocks that carry a favorable Zacks Rank [not more than #3 (Hold)] and have gained 30% or more during the first quarter, outperforming the sector. These include Blue Bird Corp BLBD, CarGurus CARG, Luminar Technologies LAZR and QuantumScape QS.
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What’s working in favor of these stocks and do they have more upside left? We will discuss but before that let’s take a look at the factors that shaped the U.S. auto market in the first quarter of 2023.
Improving Inventory the Key Catalyst
Despite economic headwinds and interest rate hikes, pent-up demand is likely to have boosted sales as inventory continues to improve, providing customers with more choices. Inventories have surged approximately 70% from the early months of 2022. High fleet shipments are also supporting sales.
Per Cox Automotive, the average loan rate for a new vehicle is now somewhere around 9% and sticker prices are above $47,000. But it seems that buyers are not hesitant to splurge on cars. A recession may be on the horizon but one can’t see the signs of it in the new-vehicle market just yet. Most auto biggies that have reported first-quarter vehicle sales figures booked year-over year growth in deliveries.
Thomas King, president of the data and analytics division at J.D. Power, says “Retail demand for vehicles remains strong, due primarily to considerable pent-up demand. The availability of new vehicles in inventory at retailers is improving, resulting in a softening of dealer margins and increased manufacturer incentive spending. But, overall, the industry remains supply constrained, and profitability is well above historical norms."
Chris Hopson, an analyst at S&P Global Mobility, believes that the resilient retail demand reflects consumers’ willingness to buy new vehicles even in the face of rising interest rates and high listing price levels. He said, “The specter of further hikes in interest rates, and acceptance of current unsettled economic conditions, may be providing impetus for those considering purchasing a new vehicle."
4 Market-Beating Auto Stocks of Q1
Blue Bird: The company is engaged in the designing, engineering, manufacturing and sale of school buses and related parts. BLBD is focused on rolling out fuel-efficient buses and electric-powertrain options amid the changing dynamics of the auto industry. The company is likely to benefit from a robust backlog and high demand for the replacement of the aging national school bus fleet. Thanks to the Environmental Protection Agency (EPA) grant program for the electrification of buses, the company expects its backlog to improve significantly, going forward. Blue Bird envisions the EPA program to generate orders for 500-700 Blue Bird e-buses, resulting in a minimum of $200 million of additional revenues. Encouragingly, it also raised guidance for fiscal 2023.
Amid the tailwinds, the stock rocketed more than 90% in the first quarter of 2023 and we expect the company’s bull run to continue. BLBD currently carries a Zacks Rank #2 (Buy) and has a VGM Score of A. The Zacks Consensus Estimate for BLBD’s fiscal 2023 and 2024 sales implies year-over-year growth of 24% and 26%, respectively. The consensus mark for fiscal 2023 and 2024 EPS implies year-over-year growth of 140% and 227%, respectively.
CarGurus: The company is an online automotive marketplace connecting buyers and sellers of new and used cars. It uses proprietary technology, search algorithms and data analytics. CarGurus is the #1 listing platform, with the largest selection of vehicles in the United States. The acquisition of the CarOffer platform has added wholesale vehicle acquisition and selling capabilities to CarGurus’ portfolio of dealer offerings. The acquisition allows the firm to offer Instant Max Cash Offer to customers who wish to sell their car while purchasing a new one. However, CarGurus’ digital wholesale trading platform, CarOffer, is suffering currently. It reported losses in the fourth quarter. CarGurus’ international business, particularly in the UK, has also been acting as a deterrent.
We are also concerned of CARG’s dim outlook. It expects first-quarter revenues and adjusted EBITDA in the band of $195-$215 million and $19-27 million, down from $430.6 million and $65.7 million recorded in the corresponding period of 2022. While the company jumped more than 33% in the first quarter of 2023, it has its fair share of risks. Investors should wait for a better entry point to buy the stock. CARG carries a Zacks Rank #3 and a VGM Score of D.
Luminar: The company operates as a vehicle sensor and software company for passenger cars and commercial trucks. It specializes in lidar sensors and autonomy software solutions.Luminar’s proprietary software, designed to unlock full lidar capabilities, enhances automakers’ ability to deliver high-speed highway autonomy at a commercial series production scale. This has been helping the company secure business wins. Contracts with Volvo, Mercedes-Benz and Polestar bode well. But with the company still at a nascent stage, high technology and product development expenses are playing spoilsport. Nonetheless, LAZR expects to reach a positive gross margin by the fourth quarter of 2023. On a brighter note, it expects revenue growth of at least 100% this year.
Shares of LAZR have soared more than 31% in the first quarter of 2023. Are you tempted to book profits? It might be better to stay invested if you have a long-term investment horizon. Luminar currently carries a Zacks Rank #3 and has a Value Score of C. The Zacks Consensus Estimate for 2023 and 2024 bottom line implies a year-over-year improvement of 75% and 1,612.5%, respectively.
QuantumScape: The company isa battery developer for electric vehicle use. QuantumScape’s next-generation cutting-edge batteries have been revolutionizing the EV space. Leveraging lithium-metal technology, QS’ batteries charge up a vehicle to 80% of its full capacity in around 15 minutes. The company aims to achieve ranges of 300 miles or more, hyper-fast charging (less than 15 minutes), cheap vehicles (less than $30k) and extended battery life (more than 150,000 miles), thus accelerating the race to mass EV adoption. Nonetheless, escalating expenses remain a major challenge for this pre-revenue company. Given the fact that QS is still in the early stage, operating expenses are on the rise and the trend is expected to continue, resulting in losses.
Shares of QS have soared more than 44% in the first quarter of 2023 but does this rally have legs? It's better you adopt a “wait and see approach” for the time being. QuantumScape currently carries a Zacks Rank #3. Indeed, QuantumScape’s battery technology holds promise but it is yet to deliver on its claims and has lots to prove amid tough competition.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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