BofA Securities analyst John Murphy named Ferrari NV RACE, Asbury Automotive Group Inc ABG, and AutoNation Inc AN as the top picks for 2024.
The Auto industry remains well-positioned to benefit from the volume recovery and the beginning of a new cycle, especially in North America.
According to the analyst, RACE (Buy rating) is a unique asset with significant intangible brand value and a true luxury status.
The analyst notes the company’s balanced strategy of restrained volume growth, strong price increases, and new model introductions over the forecast period should drive strong consistent revenue and earnings growth.
ABG (Buy rating) is a structurally better business than it was pre-pandemic and continued strong FCF allows for acquisitions including the recently closed $3 billion Koons deal and buybacks that should yield earnings upside, writes the analyst.
Despite fears that New Vehicle GPUs could decline significantly, the analyst expects GPUs to fade and that AN (Buy rating) will be able to maintain stronger SG&A leverage than pre-pandemic.
Five auto themes to watch for in 2024:
Volumes in North America are likely to continue to grow given pent-up demand from production constraints during COVID.
In late 2023 sentiment on EVs soured, and the analyst’s research indicates a dichotomy in the EV market, the premium market has moved towards electrification while mass market adoption lags.
The analyst notes this divergence is mostly driven by pricing, but don’t see EV prices converging with ICE’s in the near-term.
2024 is a new election cycle in the U.S. that will be particularly impactful for the Auto industry. According to the analyst, a Democrat victory would accelerate a transition to clean vehicles, while a Republican win would delay the transition.
The analyst expects lower raw materials and transportation costs to continue to benefit P&Ls, especially for suppliers, but labor costs remain a challenge.
Though the rapid rise in delinquencies may raise some concerns, the analyst notes that the auto credit market remains solid and credit metrics are relatively robust.
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