With the economy recovering, luxury auto sales are up. And luxury auto stocks are benefitting.
While some automakers have struggled this year with lower revenues, luxury car sales are revving up. As we’ll discuss here, the big-ticket discretionary purchases of the well-heeled are sending a positive economic message. We’ll also look at some individual luxury auto stocks that are poised to benefit from the continuing recovery.
Top income earners are normally the first ones to curtail discretionary spending at the first sign that the economy is contracting. In fact, the spending patterns of the well-heeled can be viewed as a barometer for the overall economy. Since the rich have access to the best and brightest minds on Wall Street when it comes to asset management and economic forecasting, it stands to reason that when this group sees trouble on the horizon, they respond by closing their wallets.
Conversely, when the rich begin spending on luxury purchases (and start buying luxury stocks) after a period of economic weakness, it can be taken as a sign that informed investors aren’t worried about the economy. From this observation comes a simple rule of thumb: When the shares of luxury firms are rising, the economy is holding its own.
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After a halting recovery following the market panic low in March, luxury stocks have lately shown encouraging signs of vigor. The basis behind this bullish performance has been the consensus-beating improvement in the financial performances of several major luxury auto brands. While the market for luxury cars and SUVs was decidedly tepid earlier this spring, the summer months have seen an increase in demand for top-line “flash” vehicles. Let’s take a look at some of them.
3 Luxury Auto Stocks on the Move
Luxury Auto Stock #1: Daimler AG (DDAIF)
Among the recent strength in the luxury auto space is Daimler AG (DDAIF), which manufactures trendy Mercedes cars and SUVs. While Daimler has witnessed a sales decline for some of its sedan models in the U.S., demand for SUVs remains strong. (In the last five years, in fact, Mercedes luxury crossover vehicles sales have increased 73%.) Concerning this trend, the Road Show website recently observed:
“Mercedes has responded to market trends with an enlarged lineup of SUVs to meet [growing] demand, plus it has had to devote an increasingly large part of its budget sheet to electric vehicles.”
The increased demand for Daimler-produced SUV and crossover sales can be seen in the following chart, which shows the notable improvement in the company’s share price in recent months. Daimler is an over-the-counter stock and doesn’t trade on either of the two major U.S. exchanges, so I won’t formally recommend it for purchase (OTC stocks aren’t my specialty). But the stock has been acting well and I think it will benefit from the continued demand surge for SUVs that analysts predict in the coming years (and which are expected to comprise 50% of all U.S. auto sales in 2020).
Luxury Auto Stock #2: Ferrari N.V. (RACE)
If there’s one company that epitomizes the phrase, “off to the races,” it’s arguably the world’s hottest luxury sports car maker, Ferrari N.V. (RACE). Ferrari’s order book for this year is still in the double digits in terms of growth compared to last year, in spite of COVID-related production setbacks. Wall Street analysts also foresee opportunities ahead for the firm in the “super-luxury” space (top-of-the-line models typically priced above $60,000). In a recent client note, Morgan Stanley analyst Adam Jonas wrote:
“We think Ferrari is entering a higher phase of growth and a tech transition that takes investor thinking beyond the limits of luxury goods comps … and can grow the super-luxury pie much faster (and more sustainable) than the market expects.”
Moreover, the firm is looking to increase its electronic-vehicle (EV) portfolio, which Jonas believes could comprise as much as 50% of Ferrari’s portfolio within 20 years.
Ferrari stock has zoomed ahead since bottoming in March, establishing a steadily rising trend which hasn’t wavered through the potholes suffered by other areas of the market this summer. (Incidentally, if you’re long RACE, I recommend using the 25-day line as your stop-loss guide on a closing basis.)
Luxury Auto Stock #3: Tesla (TSLA)
Speaking of electronic vehicles, the renowned leader in luxury EVs is easily Tesla (TSLA), also one of the most recognized mega-cap stocks in the world today. Tesla shares soared 13% recently after announcing a five-for-one stock split. This bullish reaction also highlights the tremendous growth of the overall EV industry.
In Q2, revenue and earnings easily beat analyst forecasts, and the firm achieved its fourth quarter of sequential profitability in the quarter, with net income of $6 billion (above the consensus revenue expectation of $5.37 billion). Tesla’s per-share earnings for the quarter were $2.18, an improvement from an adjusted loss of $1.12 per share a year ago.
Automotive gross margin, meanwhile, was 25% (up from 19%). And while Tesla previously withdrew its delivery forecast in Q1 (due to a factory shutdown), management guided for half-a-million vehicle deliveries in 2020. Analysts also predict double-digit revenue growth for both 2020 and 2021. As stated here previously, Tesla is a solid growth story and a good stock to own for the long term.
The luxury auto stocks mentioned here are important bellwethers of upscale consumer spending patterns and, as such, should be monitored closely in the months ahead. However, as upper-income earners are evidently feeling increased confidence about the economic outlook going forward, luxury auto sales (particularly for SUVs and EVs) are likely to rise, giving a boost to the share prices of the companies mentioned here.
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