Auto manufacturing declined sharply last year thanks to COVID-19 pandemic-related restrictions and a decline in demand for vehicles. And even as major economies are now gradually reopening, the auto manufacturing industry continues to be impacted by a global semiconductor chip shortage. According to Statista, the global sales of automobiles are expected to fall to below 70 million units in 2021.
Investors’ pessimism regarding the auto manufacturing industry is evident in the First Trust NASDAQ Global Auto Index Fund’s (CARZ) 3.7% returns over the past three months versus the tech-heavy Nasdaq’s 6.4% gains. While some auto manufacturers may be able to weather these trying conditions, we think it is wise to avoid fundamentally weak stocks in this space that are trading at premiums to their peers.
Ferrari N.V. (RACE), and Workhorse Group Inc. (WKHS) look significantly overvalued at their current price levels. Also, Wall Street analysts have recently downgraded their ratings on these stocks. So, we think these two stocks are best avoided now.
Click here to check out our Automotive Industry Report for 2021
Ferrari N.V. (RACE)
As one of the most well-known companies in the auto manufacturing space, RACE designs, engineers, produces, and sells luxury performance sports cars. The Italy-based company’s sports car portfolio includes F12berlinetta, Ferrari 488 GTB, Ferrari California T, and LaFerrari. The Goldman Sachs Group, Inc. (GS) recently downgraded the stock’s rating to ‘Sell’ from ‘Buy.’
RACE’s net revenues increased 8.5% year-over-year to Euro 1.01 billion ($1.20 billion) for the first quarter, ended March 31, 2021. Its shipments came in at 2,771 compared to 2,738 in the prior-year quarter. Its net income for the quarter was Euro 206 million ($244.35 million), up 24.1% year-over-year. RACE’s EPS increased 23.3% year-over-year to Euro 1.11 ($1.31).
However, RACE looks significantly overvalued now. In terms of forward non-GAAP P/E, the stock is currently trading at 39.62x, which is 144.7% higher than the 16.19x industry average. And its 7.39x forward EV/S is 376.8% higher than the 1.55x industry average.
RACE selected Amazon.com, Inc.’s (AMZN) Amazon Web Services (AWS) this month to leverage AWS’ high-performance computing (HPC) technology to test thousands of its car designs. However, it’s uncertain if this move will have any material impact on RACE’s financials in the near term. Furthermore, the stock has declined by 11.4% over the past six months to close Friday’s trading session at $200.09.
It’s no surprise that RACE has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
RACE has a D grade for Value and Sentiment. We also provide Growth, Stability, Momentum, and Quality grades for RACE, which one can find here. RACE is ranked #25 of 57 stocks in the C-rated Auto & Vehicle Manufacturers industry.
Workhorse Group Inc. (WKHS)
WKHS is a technology company that is focused on providing solutions to the commercial transportation sector. The company designs and builds high performance electric vehicles and aircraft. Its offerings include electric and range-extended medium-duty delivery trucks, and its HorseFly Unmanned Aerial System. Analysts at Cowen Inc. (COWN) recently downgraded WKHS’ rating to ‘Market Perform’ from ‘Outperform.’
For the first quarter, ended March 31, 2021, WKHS’ net sales were $521,000, which represents a 518.1% year-over-year rise. However, its loss from operations increased 1,751.5% year-over-year to $153.06 million. Its net loss for the quarter came in at $120.51 million compared to $4.76 million in net income in the year-ago period.
In terms of forward EV/S, WKHS is currently trading at 22.16x, which is 1,329.7% higher than the 1.55x industry average. Its 25.13x forward P/S is 1,818.3% higher than the 1.31x industry average. Also, analysts expect its EPS to remain negative in its fiscal years 2021 and 2022.
WKHS slashed its annual production target by nearly half last month. The company’s CEO, Duane Hughes said, “Bottlenecks within the global supply chain and offshore shipping delays of commodity raw materials and components as well as our initial stages of production limited our capacity to produce during the first quarter.” The has retreated 24.8% so far this year to close Friday’s trading session at $14.87.
WKHS’s POWR Ratings reflects this bleak outlook. The stock has an overall F rating, which equates to Strong Sell in our POWR Ratings system.
The stock has an F grade for Value, Quality, Sentiment, and Stability. In addition to these ratings, one can see WKHS’ ratings for Growth and Momentum here. WKHS is ranked #56 in the same industry.
Click here to check out our Automotive Industry Report for 2021
RACE shares were trading at $202.70 per share on Monday afternoon, up $2.61 (+1.30%). Year-to-date, RACE has declined -11.69%, versus a 12.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Ananyo Guha Niyogi
Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.
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