What are the best auto stocks to buy right now?
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Let's clarify the question. To my mind, when we're considering auto stocks in the current environment, we're looking for companies that are well run and profitable, have reasonably priced stocks, and stand a good chance of thriving amid the technological changes that are coming to the world of autos.
The risks of disruption from new tech-enabled entrants are looming over the entire auto industry. One thing all three of these companies have in common is that they're better positioned than most to gain ground with new technologies like electric vehicles and autonomous-driving systems.
So without further ado, let's take a closer look at the three: General Motors (NYSE: GM), Daimler AG (NASDAQOTH: DDAIF), and Delphi Automotive (NYSE: DLPH).
A revamp of its Cadillac luxury brand is one of several initiatives boosting GM's profitability. Image source: General Motors.
GM was once the poster child for the bad old days of Detroit. But under CEO Mary Barra, today's GM is a completely different kind of company:
- It's solidly profitable with very good margins, and Barra has a plan to boost profits significantly over the next five years or so;
- It's a leader in electric vehicles with its innovative long-range Chevrolet Bolt EV;
- It's in the forefront of self-driving research, with an advanced testing program;
- It owns a stake in ride-hailing company Lyft and owns fast-growing car-sharing company Maven outright.
While GM has made a strong push into new technologies that has positioned it as well as any incumbent automaker for the future, it hasn't neglected its core business. Its cars, trucks, and SUVs now come with much higher quality than in the past. That, along with careful management of supply and incentives, has given GM good pricing power -- and those very good profit margins.
While the U.S. market is probably past its cyclical peak, GM expects strong profit in 2017 on the strength of a new line of hot-selling crossover SUVs. And best of all, it's cheap at just over five times earnings, with a rich (and sustainable) 4.6% dividend yield.
This electric Mercedes-Benz SUV is one of many of electric cars, SUVs, and commercial trucks Daimler will bring to market in the next few years. Image source: Daimler AG.
Americans know Daimler mostly as the maker of Mercedes-Benz luxury vehicles. That's a very good business right now, with a 9.8% EBIT margin and a 14% year-over-year sales gain in the first quarter. But there's more to Daimler than that: It's also a leading maker of medium and heavy trucks and buses
Why is that important? Because Daimler has made big investments in battery-electric drivetrains and self-driving technology. It has several electric Mercedes-Benz models coming, and is busy building battery-pack factories and other infrastructure to produce them on a large scale.
Here's the thing: Those new technologies will help its luxury models go head-to-head with the likes of Tesla -- and they'll pay off in the world of trucks as well.
Daimler is already planning to begin mass-producing a medium-duty commercial truck with a battery-electric drivetrain in a few years. That'll find a ready market with companies that need to make deliveries in urban areas where diesel-powered vehicles are likely to face very tight restrictions soon. Daimler is also working on a self-driving system for tractor-trailers -- one that lets several trucks travel safely in an automated convoy, saving fuel (and, eventually, battery life).
Right now, Daimler is trading at about 8.3 times its 2016 earnings (7.97 euros per share), with a rich 4.9% dividend yield. Daimler's valuation isn't quite as cheap as GM's, but it's still a very good value if Daimler can deliver on its technology investments. The generous dividend is a nice bonus.
An Audi equipped with an early prototype of Delphi's self-driving system drove itself (mostly) across the U.S. in 2014. Delphi's technology has advanced considerably since then. Image source: Delphi Automotive.
Delphi is a big auto industry supplier that works with most of the world's automakers. Its longtime specialties have been powertrain systems (components for engines) and electronic safety systems. But that's changing: Earlier this month, Delphi announced that it would spin off its legacy powertrain businesses to focus on electronic safety systems -- and specifically, self-driving technology.
Here's where it gets interesting. Delphi has already laid the groundwork to position itself as a key supplier of integrated self-driving systems to automakers. Last year, it partnered with chip giant Intel and machine-vision experts Mobileye in a project that will bring a "Level 4" self-driving system to market by the end of 2019, available to any automaker that wants it. (Learn more about the "levels" of self-driving technology here.)
Delphi is also doing work for automakers seeking a more deeply integrated solution. Again with its partners Intel and Mobileye, Delphi is working with BMW on a series of self-driving projects that will produce several new systems that it will be able to market to other automakers.
Intel's planned purchase of Mobileye, announced earlier this year, will leave post-spinoff Delphi as perhaps the only pure-play publicly traded investment in autonomous-vehicle technology. At 20 times earnings, it's not exactly cheap for an auto supplier but it's arguably a steal given the immense potential of self-driving technology, its strong leadership team, top-drawer partners, and leading position in research and commercialization efforts.
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