3 Foreign Auto Stocks Ready to Burn Rubber - Analyst Blog

The surge in auto sales in 2013 and an optimistic outlook for 2014 have put the automobile sector in focus. Global auto sales hit a record high of 82.8 million units in 2013, per the data provided by IHS Automotive.

While most automobile manufacturers were hit hard by the recession, the resultant pent-up demand is working in their favor now that employment rates are improving and consumers have recovered from the impact of the recession.

A plunge in car sales in the years following the recession have led to an all-time high average age of vehicles on U.S. roads of 11.4 years. This is resulting in significant replacement demand. Moreover, with the recovery of global markets, sales in other nations are also improving.

Asian countries, especially China and India, are recording impressive sales growth and are expected to account for a large part of the growth in the auto industry over the next 5 to 7 years. Even the European automobile market is beginning to show improvement.

Globally, 2 of the 3 largest selling automakers in 2013 were non-U.S. companies – Toyota Motor Corp. TM and Volkswagen AG (VLKAY). Moreover, the Auto-Foreign industry has a Zacks Industry Rank of #13 at present, which translates into a Positive outlook. Meanwhile, the Auto-Domestic industry has a Zacks Industry Rank of #99, which refers to a Neutral outlook. Thus, it would be a good idea to invest in some foreign auto stocks that are performing well.

Here are three automakers based outside the U.S. that are looking good at the moment:

Japan-based Toyota is the leading automaker in the world in terms of sales and production. Its product portfolio consists of a full range of models from passenger cars and minivans to trucks as well as related parts and accessories.

Toyota is currently trading at a forward price-to-earnings (P/E) ratio of 8.7x, which is significantly lower than the industry average of 15.6x. It has a price-to-book (P/B) ratio of 1.1x, which is at a discount to the industry average of 2.9x. Even the price-to-sales (P/S) ratio of 0.8x is lower than the industry average of 2.5x.

This Zacks Rank #1 (Strong Buy) stock is expected to report a 55.5% year-over-year growth in earnings per share EPS in the fiscal year ended Mar 2014.

Tata Motors Ltd TTM is the largest automobile company in India. It is also the fifth largest truck manufacturer and the fourth largest bus manufacturer in the world.

Tata Motors also has a P/E ratio of 8.5x, which offers a significant discount on the industry average of 15.6x. Its P/B of 2.6x is marginally lower than the industry average of 2.9x. It has a P/S of 0.6x, also below theindustry average of 2.5x.

Tata Motors reported a positive earnings surprise in three of the trailing four quarters, with an average beat of 22.68%. This Zacks Rank #1 stock is expected to report 26.6% year-over-year growth in EPS in the fiscal year ended Mar 2014.

Germany-based Daimler AG (DDAIF) manufactures and sells passenger cars, trucks, vans, buses, and related spare parts and accessories. This Zacks Rank #1 stock owns the premium vehicle brand Mercedes-Benz.

Daimler has a P/E ratio of 11.1x, significantly below the 15.6x industry average. Its P/B and P/S of 1.6x and 0.6x, respectively, are also substantially lower than the respective industry averages.

Daimler is expected to report a 16.9% year-on-year surge in EPS in 2014.

Bottom Line

Global automobile sales are expected to rise to 85 million units in 2014, according to IHS Automotive. Even the 100 million unit milestone is not far and is expected to be reached in 2018.

Rising sales should translate into higher gains for auto stocks. Thus, adding some automobile stocks with strong fundamentals and growing earnings to the portfolio might prove to be beneficial for investors.