Auto stocks are in the spotlight with potential roadblocks ahead

The automobile sector heads into the last four months of the year with a mix of reasons for investors to be bullish or bearish. Supply chain issues and chip shortages have improved from a year ago, but higher interest rates, persistent inflation pressure, and the increased focus on profitability with EV names has clipped sentiment.

Bank of America estimated that August U.S. light vehicle sales will increase 16% year-over-year in August on a selling day adjusted basis, which would result in a SAAR of 15.4M vs. 15.7M in July. The firm said some of the softness in fleet sales that occurred in July likely continued into August, but thinks it was primarily due to seasonality. Looking ahead, analyst John Murphy and team think that despite the encouraging trends seen so far this year, the U.S. auto market may become more challenging in the back half for both total demand and mix. Negative factors that are seen as potentially impacting demand include broad macro uncertainty, still-high inflation, higher rates, weak consumer confidence, the risk of a U.S. recession, and the increasing likelihood of a United Auto Workers strike.

Following two weeks of moderation, the Evercore ISI Auto Dealers Survey of new car sales ticked slightly higher last week as mixed traffic was reported. Analyst Chris McNally said product availability has improved, helping sales despite tightening in financing availability for new car buyers. However, the mix of better inventory is not matching demand. Of note, the auto products available on the market are not what customers want as popular models remain in tight supply.

The recovery of supply has coincided with a rise in discounting from manufacturers. "Rising interest rates, and their impact on affordability, remain strong headwinds against a more robust vehicle market," warned Cox Automotive economist Charlie Chesbrough.

UAW watching: The United Auto Workers union landed approval from workers at Ford Motor Company (F), General Motors Company (NYSE:GM) and Stellantis (STLA) to strike if a new contract is not worked out before September 14. Of note, automobile stocks have traded higher following resolution and contract ratification in the past, in what has typically been a recovery from aggressive selloffs during the contract talks. This time around, Evercore ISI thinks Stellantis (STLA) is the North American automaker with the most risk, while suppliers (MBLY) and Magna International (MGA) are the suppliers that could see some selling pressure around fears of a long strike. Aptiv (APTV), BorgWarner (BWA), and Lear (LEA) are also identified as potential buy-the-dip stocks around UAW developments. Notably, supplier stocks have benefitted significantly after contract agreement and ratification in the past, with low-to-high recoveries of about 15% to 20% as fears of a prolonged strike give way to the removal of UAW risk overhangs for the broad auto sector.

The automobile sector stocks with the highest Seeking Alpha Quant ratings include Modine Manufacturing (MOD), Holley (HLLY), Adient (ADNT), General Motors (GM), Toyota (TM), and Ford Motor (F).

Auto stocks with year-to-date gains of over 20% include Tesla (NASDAQ:TSLA), Ferrari (RACE), Honda Motor (HMC), Modine Manufacturing (MOD), Holley (HLLY), Goodyear Tire & Rubber (GT), and Stellantis (STLA). Meanwhile, Vietnamese electric vehicle stock VinFast (VFS) has skyrocketed since its debut to a market cap of over $100B in a move that has defied fundamentals. Bankruptcy filings in the EV sector for companies Lordstown Motors (OTC:RIDEQ) have derailed the Green Tidal Wave thesis.

Auto stocks: Toyota (TM), Tesla (TSLA), General Motors (GM), Honda (HMC), Ferrari (RACE), Ford (F), Hyundai (OTCPK:HYMTF), Nissan (OTCPK:NSANY), Mercedes-Benz (OTCPK:MBGAF), Volkswagen (OTCPK:VLKAF), BMW (OTCPK:BMWYY), Stellantis (STLA), Rivian Automotive (RIVN), and Subaru (OTCPK:FUJHY).

Auto supplier stocks: Adient (ADNT), Allison Transmission (ALSN), American Axle & Manufacturing (AXL), Aptiv (APTV), Autoliv (ALV), BorgWarner (BWA), China Automotive Systems (CAAS), Cooper-Standard (CPS), Dana (DAN), Douglas Dynamics (PLOW), Garrett Motion (GTX), Gentex (GNTX), Gentherm (THRM), Johnson Controls (JCI), Lear (LEA), LKQ (LKQ), Modine Manufacturing (MOD), Monro (MNRO), Motorcar Parts of America (MPAA), Standard Motor Products (SMP), Superior Industries (SUP), Visteon (VC), Voxx International (VOXX), and Westport Fuel Systems (WPRT).