We recently compiled a list of the 7 Most Undervalued Auto Stocks To Buy According To Analysts. In this article, we are going to take a look at where Group 1 Automotive, Inc. (NYSE:GPI) stands against the other undervalued auto stocks.
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.
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).
A line of new and used cars in a large auto dealership’s showroom.
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.”
Overall GPI ranks 7th on our list of the most undervalued auto stocks to buy according to analysts. While we acknowledge the potential of GPI 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 GPI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.