By now, most market participants are aware of the UAW (United Auto Workers) union strikes, which pose a significant risk to domestic auto manufacturers and their profitability. That is about as far as the soundbite goes, but you are no ordinary investor, so you go one step further.
Realizing the impact these strikes will have on the vehicle market as a whole can guide you to pockets of opportunity that everyone else may miss due to the currently fearful sentiment. The thesis goes like this:
One outcome involves higher prices for new vehicles, passing on the costs of accommodating union strike requests. This will hurt the already slowing market for new cars, especially when adding higher financing costs.
On the other hand, rejecting striker demands can result in a significant supply bottleneck in vehicles, leaving consumers to scramble for inventory. Knowing this, analysts and markets have cast their vote on where you can move your capital to beat these scenarios and make some money.
XPEL
Moving onto a comprehensive list of automotive stocks, analysts find a good amount of value hiding in the after-market products industry, where XPEL (NASDAQ: XPEL) sits comfortably at a discount.
After a nearly 20% decline recently, this stock has grabbed the attention of its analysts, who remain optimistic about the company's future upside potential. Why would the market be more attracted to this segment of the industry?
Think about it: you cannot get a new car as quickly as you could when interest rates were at rock bottom, money was virtually being handed out for free.
And even if you could afford the financing, you are signing up for a terrific multi-month wait for your car to arrive; and that is assuming availability.
So what do you do? You consider keeping the car you own now, but it is looking a bit rough, and the uncertainty of when a new one could be bought prompts the need to replace some parts to buy yourself some time.
Even if that is not your situation, it seems to be where most American consumers are; either way, Wall Street is still on top of the trend.
Boasting a 34% and higher gross margin, XPEL financials showcase some pricing power and a business model that could be worth your attention. Net income margins of nearly 14% will reiterate that there could be some value here.
With a $95.3 price target, analysts are implying that the stock needs to rally by as much as 47.1% to reach its full potential today.
A five-year average ROIC (return on invested capital) of 24.0% acts as the sounding board for the possibility of compounded returns. Kudos to management for being great capital allocators.
CarMax
Part of the whole value play in the vehicle market also concerns used vehicles; what happens if either of the described scenarios happens? Well, prices are set to remain higher for new cars, and inventory is virtually unavailable.
What is the next logical place to look? Used cars, CarMax (NYSE: KMX) is at the center of this root, feeding the momentum behind XPEL, a dot here - a dot there, and you begin to get the whole picture.
Despite a recent decline of almost 20% after its earnings announcement, some on Wall Street still believe a significant gap exists between today's price and the company's actual value, including its future potential.
Here's some food for thought: when all else is equal, earnings per share - and their growth - typically drive stock valuations. In the case of CarMax, analysts see a net upside of 12.5% from today's prices, all the while expecting EPS to jump by 25.6% in the next twelve months.
According to Truist Financial (NYSE: TFC) analyst Scot Ciccarelli, year-on-year car prices have increased by 35%, while prices for pre-owned vehicles decreased by 7.8%, go figure where the demand will rise and decline with these trends.
Gentex
Another honorable mention in the after-market products industry, which suffered a recent - though not as severe - decline of 9.6%, is Gentex (NASDAQ: GNTX) and its tremendous set of financials.
With an industry-leading net income margin of 17-20%, this is one of the few names that offer the opportunity of market-beating returns, assuming you have the stomach to hold for the long term and allow compounding to do its thing.
Like CarMax, there seems to be a disconnect between price targets and future expectations; perhaps analysts may have wanted to lie on the cautious side.
With an expected upside of only 3.5%, price targets may have to be adjusted soon to match the EPS expectations of a 24% jump for the next twelve months.
In either case, the mere jump in earnings suggests that these three stocks - and their upside - are interconnected by the same underlying trend of money and value flowing to these pockets of the industry.
