The Zacks Automotive – Original Equipment industry is in the doldrums as automakers are struggling to meet the mounting demand for vehicles amid microchip crunch. This is prompting them to temporarily suspend operations and slash production targets, thereby resulting in reduced demand and lost revenues for the automotive equipment providers.
Evidently, the industry currently carries a Zacks Rank #201, which places it in the bottom 20% of approximately more than 250 Zacks industries. Over the past year, the Zacks Original Equipment industry has lagged the broader Auto sector as well as the Zacks S&P 500 composite. The industry has tanked 50.5% over this period compared with the S&P 500 and the sector’s decline of 6.6% and 24.1%.
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Given the murky scenario of the industry, ferreting out harmful stocks and abandoning them at the right time is the key to protecting your portfolio from big losses. We recommend you to steer clear of two auto parts providers — namely Autoliv, Inc. ALV and Adient plc ADNT — which carry an unfavorable rank and have fundamental drawbacks. But before delving deep into these fallen pieces, let’s take a closer look into the factors that make the prospects of the industry muted.
Supply Chain Snarls & Cost Bumps Ahead
Auto equipment manufacturers are dependent on microchips and a shortfall of the same is hindering their business operations. Chip crisis and supply chain disruptions have been compounded by the Russia-Ukraine war and are not expected to ease out anytime soon.
The industry players are also likely to suffer from rising prices of raw materials and a tough labor market. Most of the industry players have acknowledged that the increasing cost of raw materials is set to impact their margins. With supply chain distortions worsening amid geopolitical tensions and the resurgence of lockdown in China, commodity inflationary pressure is likely to continue.
Although evolving technologies and rising demand for electrified and autonomous vehicles are providing new opportunities to the industry, they are anticipated to strain the near-term financials of companies. With technology shift in full swing, original equipment manufacturers have to develop and upgrade their offerings to remain on par with the evolving trends in the automotive market. The new features, upgrades and component designs call for abundant capital, which is likely to clip near-term cash flows.
Most auto equipment manufacturers are likely to have a tough time balancing their revenue generation, given broader challenges and escalating expenses. With the industry already in disarray amid the chip crisis, the performance of the companies will largely depend on how well they can manage the rising commodity and R&D expenses.
2 Stocks to Avoid
Autoliv: This Zacks Rank #5 (Strong Sell) stock has contracted 24% year to date. Over the trailing four quarters, Autoliv missed earnings estimates thrice and matched once, the average negative surprise being 27.6%. The Zacks Consensus Estimate for 2022 earnings implies a year-over-year decline of 13%. The consensus mark has been revised downward by 34% over the past 60 days.
Soaring costs of raw materials, high capex requirements and unfavorable currency translations are likely to limit Autoliv’s margins. ALV anticipates commodity inflation to clip 2022 operating margins by 6%. It has also trimmed its 2022 projections for a few parameters, which raises concern. The company estimates an adjusted operating margin of 5.5-7%, lower than the prior guidance of 9.5% as well as 8.3% recorded in 2021. Operating cash flow is envisioned in the band of $750-$850 million, down from the prior view of $950 million. Currency translation effects are predicted to be around negative 3%.
Adient: This Zacks Rank #4 (Sell) stock has declined 22% year to date. Over the trailing four quarters, Adient missed the earnings estimates thrice and topped once, the average negative surprise being 506.1%. The Zacks Consensus Estimate for fiscal 2022 earnings implies a year-over-year fall of 94.2%. The consensus mark has been revised downward by 75.5% over the past 30 days.
ADNT expects its near-term results to continue to be impacted by temporary operating inefficiencies, increased freight costs, tough labor market and logistical challenges. It anticipates inflationary pressures, such as rising energy costs, steel costs and ocean freight to continue to escalate, thereby hurting its 2022 margins. Consequently, Adient has downwardly revised its fiscal 2022 forecast. It now envisions revenues of $14.2 billion, down from the prior forecast of $14.8 billion. Adjusted EBITDA is expected to decline $100 million from the year-ago levels.
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