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3 Top Auto Stocks for 2022, According to RBC

We’re about to turn the page on the calendar, put 2021 behind us, and stride into the brave, new year of 2022 – and Wall Street’s prognosticators are busy scanning the stocks to find the winners and losers for next year’s markets. Whether it’s individual stocks, whole industry sectors, or some combination of both, the analysts are finding plenty of Buy-rated equities for investors to consider.

Take the automotive sector. Few industrials will present as many investment opportunities, both in 2022 and going forward; it’s an essential industry, and it’s in the midst of a sea-change as electric and alt-fuel drive technologies are expanding, and gasoline engines are falling out of social favor.

In coverage for RBC, analyst Joseph Spak sees the auto sector primed for a strong rebound post-COVID. He writes, “We believe the multi-year volume recovery backdrop driven by improvement in semiconductor and supply chain availability coupled with low inventories and improving schedule stability provides a solid backdrop for the suppliers.”

Spak acknowledges near-term volatility, of course. Semiconductor chips are still in short supply, and transport bottlenecks are still plaguing the industry, but consumer demand is rising, and credit should remain plentiful even if the Fed does implement a rate increase next year. All of this, in Spak’s view, adds up to a 2H22 weighting for improvements in automotive stocks.

Against this backdrop, the analyst is pounding the table on three auto stocks in particular, noting that each has the potential to deliver strong gains in the year ahead. We ran the names through TipRanks’ database to see what other Wall Street’s analysts have to say about them.

Rivian Automotive (RIVN)

We’ll start in the EV (electric vehicle) segment, with Rivian Automotive. This company, which has been in business since 2009, is working to develop a new platform to make efficient use of both the hardware and software sides of the emerging EV technology. The basic idea is to create a flexible chassis that includes a built-in electric drive system, with fittings for various battery units depending on need, and able to accept modification through body and seating installations.

It’s an ambitious plan. Rivian’s approach will support various vehicle types with a high level of parts interchangeability for ease of manufacture and cost control, while allowing customers to buy a strongly individualized vehicle. So far, Rivian has two vehicle models in prototype production development; their R1T is a light pickup truck, while their R1S is an SUV. Both use the common platform and can drive on- or off-road. The company has received approximately 71,000 pre-orders for the R1 from the US and Canada.

In addition to the two consumer-oriented models, Rivian is working in partnership with Amazon to develop an all-electric delivery van, optimized for urban environments. The initial order from Amazon will total 100,000 vehicles.

Rivian has been successfully raising funds in the past year, including a $2.65 billion funding round in January of this year and a $2.5 billion round in June. These were followed by the company’s well-publicized November IPO, which saw Rivian raise $12 billion in gross proceeds. Since being listed, the stock has been very volatile, yet still boasts a market cap over $87 billion.

This month, Rivian released its first quarterly report as a public firm and showed some important milestones – and headwinds. On the negative side, the company reported a deep operational loss, of $1.23 billion, although the figure was well within the previous guidance of $1.21 billion to $1.28 billion. Worse than the cash burn, the company admitted that supply chain problems have slowed production, and it will fall ‘several hundred vehicles short’ of the planned 2021 production total of 1,200 EVs.

On the positive side, Rivian’s pre-orders have been accelerating. The 71,000 total for R1s is up 28% from the November figure. And, the company will be opening a new battery and assembly facility near Atlanta, Georgia, with construction starting in mid-2022 and the facility beginning operations in 2024. The plant is planned for production capacity of 400,000 vehicles annually.

RBC’s Spak is bullish on this company. He notes the Amazon partnership as a path toward sure sales of electric delivery vans and a foot into the urban ‘last mile’ delivery market, and sees that as something of a safety net for the company. On the consumer side, Spak writes, “We like the segments Rivian is going after and the product looks like a winner. Rivian will initially focus on the NA market, a region we believe is on the cusp of a BEV inflection. Further, ~77% of 2021YTD US light vehicle sales are trucks which is where the Rivian consumer portfolio is focused. Rivian’s initial consumer products, the R1T and R1S, are very impressive and category defining.”

These comments back up an Outperform (i.e. Buy) rating, and a $165 price target implies an upside of 70% for the year ahead. (To watch Spak’s track record, click here)

The RBC view is on the bullish end; overall, Wall Street gives this stock a Moderate Buy consensus rating, based on 14 reviews including 10 to Buy and 4 to Hold. The shares are selling for $96.84 and their $134.64 average price target suggests that RIVN stock has room to run another 39% over the next 12 months. (See RIVN stock analysis on TipRanks)

General Motors (GM)

The next automotive stock on our list needs no introduction. GM is one of the major legacy automakers, and one of Detroit’s most storied names. The company is the largest of the Big Three automakers, and its product portfolio includes some famous nameplates: Buick, Cadillac, and GMC, to give just a few.

The company has seen its stock gain by an impressive 37% year-to-date even as revenues have slipped over the course of the year. For Q3, the top line came in at $26.7 billion, down from $34.1 billion reported in Q2, and down 24% from the year-ago quarter. Earnings have also slipped; the $1.52 reported was the lowest since the pandemic-induced loss of 50 cents per share in 2Q20.

While revenues and earnings showed declines, GM’s market share showed a more complicated picture. The company’s sales data show it commands a 13.3% market share in the US automotive sector, compared to just 6.9% in the year-ago quarter. But – market share in Q2 was higher, at 15.6%. The volatility here was driven by a decline in auto sales; GM reported moving 446,997 vehicles of all types in Q3, down 33% yoy.

Company management pointed to supply chain disruptions and semiconductor shortages – factors affecting the industry as a whole – as root causes of the rough quarterly sales and results. They are not, however, sitting on their duffs.

GM is actively preparing for the auto industry’s shift to EVs. The company already produces the Chevy Bolt, an all-electric compact car, and its BrightDrop division is in production of all-electric light commercial vehicles for both the first- and last-mile delivery niches. BrightDrop this month delivered its first 5 EV600 delivery vans to FedEx (FDX). These vehicles are the first of a 500-truck order by FedEx.

Also on the EV front, GM announced on December 7 a major investment at its Bedford, Indiana aluminum casting facility. The investment, of $51 million, is for modernization and upgrades that will allow the plant to produce drive unit castings for the upcoming all-electric version of the popular Silverado pickup truck.

These last few items bring us to an important point that Joseph Spak makes – that ‘automaking starts with product.’ Spak goes on to delineate GM’s upcoming EV product line. He writes, “GM has an onslaught of BEVs coming to market including the Hummer, Lyriq, e-Silverado/Sierra and several high-volume entries like e-Equinox/Blazer equivalents priced at $30k (and hinted at something priced even lower) as part of 30 EV models by 2025 (1mm units). Showing new Ultium (GM’s battery and motor tech platform) product with competitive pricing and better specs is key, in our view.”

Spak rates GM shares as another Outperform (Buy), and he sets a $74 price target on this legacy stock, suggesting a 12-month upside of 30%.

Does the Street agree? It would seem so, as GM’s 13 recent analyst reviews break down 11 to 2 in favor of Buy over Hold, for a Strong Buy consensus rating. The shares are selling for $56.91 and their average target of $74.08 is practically identical to Spak’s objective. (See GM’s stock analysis at TipRanks.)

Autoliv (ALV)

You don’t just buy a car, you also buy its ancillary systems and accessories. And this means that there are more investment opportunities than just automakers in the automotive sector. Autoliv is a safety company, producing a range of safety systems including airbags and seatbelts, passive safety electronics, and even steering wheels. The company handles all aspects of the production process, from development to manufacturing to marketing, and in 2020 had a 42% market and $7.46 billion in total revenue.

Autoliv is a major Tier 1 supplier to the automotive industry, and boasts a hefty network to support its operations. The company has 5,700 workers – nearly 10% of its workforce – involved in R&D, and has 14 technical centers around the world. Among them, these tech centers have 20 test tracks, a vital piece of infrastructure in the industry – and more than any other automotive parts supplier in the safety segment.

This year has been difficult for Autoliv, for the same reasons that GM has also had a difficult year. The supply chain problems have disrupted both acquisition of materials and distribution of products; as a result, in 3Q21, the company reported $1.85 billion in revenue, down by 9% from the year-ago quarter. EPS was also down, by more than half, from $1.48 per share in 3Q20 to 73 cents in 3Q21.

On a positive note, Autoliv is still on track to beat last year’s total revenues. For the first three quarters, the company posted $6.11 billion at the top line, compared to $4.94 billion in the first three quarters last year. Also positive, Autoliv reported operating cash flow in Q3 of $188 million, including $77 million in free cash flow. This was more than enough to support continued profit sharing, including a common share dividend of 62 cents and an aggressive share repurchase program.

Once again, we’ll turn to Joseph Spak, who is clearly sanguine about what he sees here, writing, “We view ALV as a stock to ride the cycle to higher volumes, margins and cash flow with attractive capital returns and faces no overhang from the powertrain transition and/or insourcing debate among suppliers.”

Turning to the company’s cash position, Spak adds, “While guidance technically calls for annual FCF >$600mm, we believe it could be higher driven by volume, margins and working capital release. ALV announced a $1.5bn share repurchase program which is >15% of current market cap…”

In line with these comments, Spak rates ALV as Outperform (Buy). He puts a price target of $130 on this stock, indicating potential for 29% upside by the end of 2022.

Again, we’re looking at a stock that Wall Street is treating with some caution. There are 12 recent reviews here, and they include 5 to Buy against 7 to Hold, for a Moderate Buy consensus. The average price target of $110.27 implies a modest 9% upside from the trading price of $101.06. (See Autoliv’s stock analysis at TipRanks)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.