In this article, we discuss the 7 most undervalued auto stocks to buy according to analysts and the latest updates around the industry.
Evolving Dynamics in the Auto Industry
As reported by TipRanks, Morgan Stanley recently released a report, in which in which it pointed out major changes in the automotive industry, mainly due to China’s growing production capabilities. The firm mentioned that China is now making 9 million more cars than it sells, which is shaking up competition in the Western market.
Due to this, the bank has downgraded its assessment of the U.S. auto industry from Attractive to In-Line. The change reflects rising vehicle inventories in the U.S., affordability challenges for consumers, and an increase in credit defaults among less-than-prime borrowers.
On a brighter note for car dealerships, the bank upgraded several franchise dealer stocks to Overweight.
The firm believes that worries about franchise dealers have diminished, especially compared to the challenges faced by automakers linked to China and their electric vehicle investments. The perspective shows a shift in attention, as China moves from being a source of demand to one of surplus supply, impacting global automotive trends.
Moreover, in another report by the bank named “The Future of Cars,” the firm discussed that advancements in technology are projected to drive a rise in software-defined vehicles (SDVs), potentially making up 90% of vehicle production by 2029 and dominating the market by 2040.
SDVs will feature improved computing power that allows for remote updates similar to smartphone apps, which could lead to an expected increase in chip spending of approximately $15 billion over the next five to six years.
However, the path to widespread SDV adoption will involve challenges. Manufacturers need to make sure these vehicles are viewed as safe, addressing cybersecurity concerns and redesigning traditional vehicle architectures. By consolidating multiple functions into fewer high-performance processors, automakers can streamline designs and support advancements in automation and self-driving technology.
Long-Term Perspective on EV Industry in the West
Like every other industry in the 21st century, the auto industry is also evolving and the most common topic of discussion is the EV industry. While the industry has grown significantly over the last few years, it has experienced a slowdown recently due to several factors including slow growth of infrastructure and higher prices compared to ICEs.
In a recent interview with CNBC, Christian Kames, managing director of Lazard, addressed concerns from European automakers about declining demand for electric vehicles and potential reductions in electrification plans.
He suggested that these worries might be overstated, as the automotive industry is undergoing a significant transformation, with new technologies often facing initial hype followed by periods of disappointment.
Kames acknowledged the current lack of demand and insufficient charging infrastructure but highlighted that global initiatives are being implemented to improve EV infrastructure and technology investments. He expressed confidence that electrification will ultimately succeed. He suggested that European manufacturers need to keep investing to maintain competitiveness in the long run.
When discussing future leaders in the EV market, Kames recognized the rising competition from Chinese brands but argued that it is too soon to discount Western automakers. He emphasized that all major car companies are aware of the ongoing transformation and are taking action to adapt, which will be crucial in the next few years.
Apart from electrification, autonomous vehicles are the next big thing. According to Precedence Research, the global market for autonomous vehicles was valued at approximately $158.31 billion in 2023 and is expected to reach around $2.75 trillion by 2033. This represents a compound annual growth rate of 33% from 2024 to 2033.
With that, we look at the 7 Most Undervalued Auto Stocks To Buy According To Analysts.
7 Most Undervalued Auto Stocks To Buy According To Analysts
Our Methodology
For this article, we used stock screeners to identify over 70 auto manufacturers along with auto and truck dealership stocks. Next, we narrowed our list to 7 stocks with forward price-to-earnings ratios below 15 and the highest average analyst price target upside, as of October 4. The most undervalued auto stocks are listed in ascending order of their average analyst price target upside. We also added the hedge fund sentiment around each stock which was taken from Insider Monkey’s database of 912 hedge funds as of Q2.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
7 Most Undervalued Auto Stocks To Buy According To Analysts
7. Group 1 Automotive, Inc. (NYSE:GPI)
Number of Hedge Fund Holders: 37
Forward PE Ratio: 9.34
Average Price Target Upside: 13.91%
Group 1 Automotive, Inc. (NYSE:GPI) is a major player in the automotive retail industry. The company has established itself as a leading retailer by selling new and used vehicles, arranging financing, offering service and insurance contracts, and providing maintenance and repair services. It operates 147 dealerships in the U.S. and 55 in the U.K.
The recent activities of the company highlight an approach to growth and optimization within the automotive retail sector. During the first half of 2024, the company acquired nine dealerships in the U.S., including brands like Honda, Lexus, and Mercedes-Benz, for a total cash payment of $690.4 million, which resulted in $287.5 million in goodwill.
Moreover, it announced a planned acquisition of 54 dealerships in the U.K. from Inchcape plc for approximately $439 million. The acquisition was finalized in August and these locations are expected to bring in $2.7 billion in annual revenue.
On the sales side, Group 1 (NYSE:GPI) sold seven dealerships and one collision center in the U.S. during the same period, recording a net pre-tax gain of $51.6 million and reducing goodwill by $62.5 million.
Most recently, the company announced its expansion in the U.K. through the acquisition of Soper of Lincoln BMW/MINI, located in Lincolnshire. The acquisition is projected to bring in around $125 million in annual revenue. Overall, it has now achieved approximately $3.9 billion in annual revenues from acquisitions in 2024, following $1.1 billion in 2023.
It is the 7th most undervalued auto stock on our list.
Conventum – Alluvium Global Fund stated the following regarding Group 1 Automotive, Inc. (NYSE:GPI) in its Q2 2024 investor letter:
“As most readers know, the Fund is constrained by “risk” regulations, one of which stipulates that no more than 40% of the Fund’s assets can be held in positions of above 5% and no position can be greater than 10% (known as the 5/10/40 rule). By early May, as a result of our March buying and the share price rising, Group 1 Automotive, Inc. (NYSE:GPI) (up 1.9%) had come to represent more than 5% of the Fund’s assets. Whilst we like Group 1, we also like all the other Fund holdings that are above 5%. And, unlike those, when it comes to Group 1 there is another attractive company in the same sector available for our investment. Although we prefer the Group 1 model, the economics of Autonation look attractive to us. And by introducing this into the portfolio we could thereby invest more than 5% of assets in this sector without necessitating the sale of other attractive large positions. And so after selling a little Group 1 and buying Autonation we ended the quarter with 4.1% and 1.9% positions respectively.”
6. AutoNation, Inc. (NYSE:AN)
Number of Hedge Fund Holders: 38
Forward PE Ratio: 9.71
Average Price Target Upside: 18.25%
AutoNation, Inc. (NYSE:AN) is one of the largest automotive retailers in the U.S. It operates a nationwide network of dealerships and offers new and used vehicles, financing options, parts, and expert maintenance and repair services. The company’s growth strategy has included acquiring various businesses in the car rental sector and improving its portfolio and market presence.
According to its latest 10-Q filings, it operates 347 new vehicle franchises across 251 stores primarily located in major Sunbelt metropolitan areas. It offers a diverse range of 32 new vehicle brands, including Toyota, Ford, and Honda. AutoNation (NYSE:AN) captures a significant share of the automotive market and is one of the most undervalued auto stocks to buy according to analysts.
In addition to new vehicles, the company operates 52 AutoNation-branded collision centers, 23 used vehicle stores, and various automotive services, including parts distribution and mobile repair. Its operations are organized into three segments: Domestic, Import, and Premium Luxury, with revenue contribution from parts and service operations.
In addition to its retail success, the company engages in community initiatives, especially through its DRV PNK program, which has raised substantial funds for cancer-related causes, which shows its dedication to making a positive impact beyond the automotive sector.
On September 11, Stephens initiated coverage of AutoNation (NYSE:AN) and gave it an Overweight rating and a price target of $210, as per The Fly. The firm believes that it is “most basic, least uncertain” for investors to get involved with the six main dealership groups in the market.
The firm also pointed out that only 5% of the company’s revenue has come from acquisitions since 2019, suggesting that most of its income is from existing operations rather than newly purchased businesses. The price target represents an upside of nearly 23% to the company’s stock, as of October 4.
Conventum – Alluvium Global Fund stated the following regarding AutoNation, Inc. (NYSE:AN) in its Q2 2024 investor letter:
“AutoNation, Inc. (NYSE:AN) (down 3.7%) operates around 350 dealer franchises across the US, as well as collision centres and used vehicle stores. When compared to Group 1, it sells more units at a slightly higher price and margin, and derives around 50% more revenue. But its strategy is different, with nationwide branding and centralised operations. Although we prefer the Group 1 model, the economics of Autonation look attractive to us. And by introducing this into the portfolio we could thereby invest more than 5% of assets in this sector without necessitating the sale of other attractive large positions. And so after selling a little Group 1 and buying Autonation we ended the quarter with 4.1% and 1.9% positions respectively.”
5. General Motors Company (NYSE:GM)
Number of Hedge Fund Holders: 72
Forward PE Ratio: 4.58
Average Price Target Upside: 19.31%
General Motors Company (NYSE:GM) is a major global automaker known for designing, building, and selling trucks, cars, crossovers, and automotive parts. The company’s well-known brands include Buick, Cadillac, Chevrolet, GMC, Baojun, and Wuling. It distributes its products through a wide network of retail dealers and distributors, serving both individual buyers and fleet customers. It is one of the most undervalued auto stocks to buy.
The company is moving toward electrification with its Ultium Platform. It is GM’s electric vehicle battery and motor system designed for flexibility across various brands and models. It was launched in 2020 and features a modular design with pouch-style battery cells and shared power electronics.
Ultium Drive includes five drive units and three types of electric motors that support front, rear, and all-wheel drive configurations. The system uses nickel-cobalt-manganese-aluminum battery chemistry. Ultium batteries are scalable and support different vehicle sizes and power needs.
In the third quarter, General Motors (NYSE:GM) and its dealers saw a 3% increase in U.S. retail sales, delivering a total of 659,601 vehicles, though overall deliveries were down 2%. The company achieved a record quarter for EV sales, with 32,095 deliveries, marking a 60% year-over-year increase and a 46% rise from the previous quarter.
In the fourth quarter, the company is planning to launch five ICEs including 2025 models of GMC Terrain, GMC Yukon, Chevy Suburban, Cadillac Escalade, and Chevy Tahoe. It is also launching two EVs, which include the 2025 Cadillac Escalade IQ and the 2025 Cadillac Escalade OPTIQ.
On October 1, The Fly reported that Goldman Sachs increased its price target for General Motors (NYSE:GM) from $53 to $61 while maintaining a Buy rating. The change is part of a broader review of the U.S. auto and industrial sectors.
The firm has also lowered its forecast for the U.S. Seasonally Adjusted Annual Rate, as the firm noted that it has been weaker this year, at an average of around 15.5 million vehicles. Additionally, surveys show that fewer lower-income consumers plan to buy vehicles.
Despite these issues, Goldman Sachs is still positive about General Motors’ (NYSE:GM) long-term profit potential, pointing out that it has outperformed other auto stocks this year due to good pricing strategies and capital management.
Diamond Hill Capital stated the following regarding General Motors Company (NYSE:GM) in its Q2 2024 investor letter:
“Other top Q2 contributors included Extra Space Storage and General Motors Company (NYSE:GM). Shares of automobile manufacturer General Motors (GM) rose as its internal combustion engine business has also received a boost from the recent slowdown in electric vehicle adoption among consumers. GM also announced additional share repurchases in Q2, reinforcing its commitment to returning cash to shareholders.”
4. Rush Enterprises, Inc. (NASDAQ:RUSHA)
Number of Hedge Fund Holders: 18
Forward PE Ratio: 14.66
Average Price Target Upside: 22%
Rush Enterprises, Inc. (NASDAQ:RUSHA) is a provider of solutions for the commercial vehicle industry. It operates Rush Truck Centers, the largest network of commercial vehicle dealerships in North America. Rush has over 200 dealer networks across the US and Canada. It ranks at 4 on our list of most undervalued auto stocks.
The centers represent manufacturers like Peterbilt, International, Ford, and others, and offer a range of services including vehicle sales, parts, service, body shop operations, and financial services.
Apart from Rush Truck Centers, the company’s divisions include Rush Truck Leasing for leasing and rentals, and Rush Bus Centers specializing in school and commercial buses. Additional offerings cover crane and refuse systems, towing solutions, vehicle insurance, and custom chrome parts through brands like Chrome Country.
Rush (NASDAQ:RUSHA) also focuses on CNG fuel systems with its joint venture, Cummins Clean Fuel Technologies, and offers vehicle up-fitting services through Custom Vehicle Solutions. Its specialized businesses include Perfection Truck Parts & Equipment, The House of Trucks, and World Wide Tires, each providing tailored products and services for commercial transportation.
In the second quarter, the company reported revenues of $2 billion and a net income of $78.7 million, or $0.97 per diluted share. The company announced a 5.9% increase in its quarterly cash dividend, now at $0.18 per share.
Despite challenges in the trucking industry, particularly due to low freight rates, company management noted strength in key customer segments like the public sector and vocational, which strengthened Class 8 truck sales and market share.
Aftermarket product demand declined slightly, with parts, service, and body shop revenues dropping 3.6% year-over-year. Truck sales remained strong, with 4,128 new Class 8 trucks sold, but were impacted by an 18.6% decline in the U.S. Class 8 retail sales due to lingering freight recession and higher order cancellations. Class 4 through 7 truck sales showed resilience, with 3,691 units sold. Used truck sales fell 7.8% year-over-year due to weak demand and increased competition from new trucks.
For the future, Rush (NASDAQ:RUSHA) expects the challenging market conditions to persist, particularly in new Class 8 truck sales, while vocational truck sales should remain strong. The company is focusing on expense reductions and leveraging its diverse customer base to navigate the tough market environment. Nevertheless, the CEO and President, Rusty Rush is optimistic about the company’s ability to perform well in downturns.
3. Honda Motor Co., Ltd. (NYSE:HMC)
Number of Hedge Fund Holders: 12
Forward PE Ratio: 6.71
Average Price Target Upside: 25.62%
Honda Motor Co., Ltd. (NYSE:HMC) is a Japanese multinational conglomerate, mostly recognized for its automobiles, motorcycles, and internal combustion engines. While the company has a remarkable portfolio of ICE and hybrid vehicles, the company has solid plans to become a major EV producer. With average price target upside of 25.62%, it is the 3rd most undervalued auto stock to buy.
The company is committed to achieving full electrification by 2040, aiming for all global sales to come from BEVs and Fuel Cell Electric Vehicles (FCEVs). Despite a perceived EV slowdown, the company expects a steady shift toward EVs in the coming years.
To stay competitive, especially against emerging Chinese manufacturers, Honda (NYSE:HMC) is focusing on the full EV lifecycle, including battery value chains, production technology, and charging infrastructure. It plans rapid EV launches by 2026 and aims to strengthen its EV brand by 2030 while using its ICE business to fund future electrification efforts.
According to Honda Report 2024, the company will invest 10 trillion yen (1 Yen = US $0.0068) in electrification and software by 2031, with 3.5 trillion yen allocated by 2026 and 6.5 trillion yen after that. These funds will support competitive EV development, reduce costs, and build a vertically integrated EV value chain.
Moreover, shareholder returns, including dividends of over 1.3 trillion yen from 2022 to 2026, will remain a priority, with share repurchases used to improve capital efficiency. Honda (NYSE:HMC) is focused on achieving a return on invested capital of 10% or higher by 2031 as it transitions from ICE to EVs.
It plans to generate 12 trillion yen in cash flows by March 2026 and more in the following five years, driven by internal combustion engine and EV growth.
In the short term, the company is aiming for an operating income of 1.42 trillion yen and a 7% revenue on-sales target, for the fiscal year ending March 31, 2025. Shareholder returns will include a dividend of 68 yen and a 300 billion yen share repurchase.
2. Stellantis N.V. (NYSE:STLA)
Number of Hedge Fund Holders: 31
Forward PE Ratio: 4.15
Average Price Target Upside: 32.81%
Stellantis N.V. (NYSE:STLA) is a Netherlands-based global automotive manufacturer formed in 2021 through the merger of Fiat Chrysler Automobiles (FCA) and the PSA Group. It is one of the largest and fastest growing automotive brands in the world. It is also one of the most undervalued auto stocks according to analysts.
The company owns several well-known brands such as Chrysler, Jeep, Alfa Romeo, Maserati, and Peugeot. The company has made substantial investments in electrification as part of its “Dare Forward 2030” strategy, aiming for 100% battery electric vehicle (BEV) sales in Europe and 50% in the U.S. by 2030, alongside a goal of offering more than 75 BEV models globally.
On October 4, the WallStreet Journal reported that Stellantis (NYSE:STLA) is implementing significant cost-cutting measures to improve its financial stability. It is adopting an internal strategy dubbed the “doghouse” to limit external spending.
It aims to enforce stricter controls on purchase requisitions from outside vendors. The company CFO, Natalie Knight emphasized that improving discipline in spending could lead to significant savings for the company. Although the guidelines are not new, the company clarified that this approach targets projects requiring additional scrutiny without impacting existing purchase orders or invoices.
Stellantis (NYSE:STLA) is also quite a shareholder-friendly company that has a remarkable dividend yield of over 12%. Despite that, its payout ratio is 44%. On February 15, Stellantis announced a share buyback program worth up to €3 billion, set to run until December 31, 2024.
It completed the first phase of the program on May 1 and purchased 41,094,781 common shares, and the second phase on June 27, with 51,025,628 shares bought. The third phase began on August 1, which has been completed.
The company spent a total of nearly €1 billion to buy back 72,041,332 common shares since August 1. As of October 2, the company now holds 3.95% of its total shares as treasury stock. It is one of the most undervalued auto stocks to buy.
1. Cars.com Inc. (NYSE:CARS)
Number of Hedge Fund Holders: 17
Forward PE Ratio: 8.66
Average Price Target Upside: 33.76%
Cars.com Inc. (NYSE:CARS) is a U.S.-based automotive classified site and one of the largest companies in its industry. It streamlines car buying and selling with AI-powered tools that cover all stages, from pretail to post-sale. According to the company, it is visited by over 25 million in-market consumers monthly.
The company’s platform includes four key brands. Cars.com focuses on automotive marketplaces and dealer reputation. Dealer Inspire offers retail technology and marketing services. Accu-Trade provides trade-in and appraisal tools. Cars Commerce Media Network delivers exclusive media solutions.
In the second quarter, Cars (NYSE:CARS) achieved 6% revenue growth year-over-year, driven by strong performance in the OEM sector, which rose 28%. Dealer revenue also increased due to a rise in dealership numbers, while adjusted EBITDA grew 10%.
Free cash flow reached $56 million, marking a three-year high. Despite challenges like the CDK system disruption affecting dealer operations and sales momentum, the company focused on supporting dealers and aims to rebuild sales in the third quarter, especially for products like Accu-Trade.
The CDK disruption refers to a ransomware attack on CDK Global that shut down key systems at nearly 15,000 dealerships in North America. It resulted in over $1 billion in losses for car dealerships.
The company is expected to post its Q3 results between October 30 and November 4. In the quarter, it expects revenue of $178 million to $181 million, with a 2% to 4% year-over-year growth. The CDK disruption will impact third-quarter performance, but the company remains focused on growing product adoption and expanding its OEM partnerships. Full-year revenue growth is projected between 4.5% and 5.5%, with an adjusted EBITDA margin of 28% to 30%.
On August 23, TipRanks reported that Barrington analyst Gary Prestopino maintained a Buy rating for Cars (NYSE:CARS) with a $25 price target. His optimistic outlook is based on the company’s solid Q2 performance, which showed a 6% revenue increase and a 10.5% rise in adjusted EBITDA, despite challenges from the CDK cyber incident.
The company also reported a record free cash flow and strong dealer customer growth, with revenue from dealer services up 4.2%. Additionally, the AccuTrade product demonstrated strong retention and accuracy, supported by OEM endorsements, which solidified Cars.com’s competitive position and long-term prospects.
With an average price target of 33.76% as of October 4, Cars (NYSE:CARS) tops our list of most undervalued auto stocks to buy according to analysts.
While we acknowledge the potential of Cars.com Inc. (NYSE:CARS) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CARS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure. None. Insider Monkey focuses on uncovering the best investment ideas of hedge funds and investors. Please subscribe to our daily free newsletter to get the latest investment ideas from hedge funds’ investor letters by entering your email address below.
