If one thing is true about investors, it's that they all love to find the next high-flying stock, or overlooked hidden gem that will give them returns worth bragging about. Here are three auto stocks that many investors may be overlooking, but shouldn't.
Burning rubber
While Ferrari's (NYSE: RACE) vehicles and its iconic logo are well known, the stock is often overlooked by investors as it sits in the capital-intensive and historically low-margin automotive industry. However, that's a mistake, as the company has many competitive advantages that separate it from typical automakers.
Let's start with an eye-catching statistic: Ferrari's operating margin is nearly 3 times higher than other automakers'. In fact, Ferrari's operating margin typically hovers between 25% and 30%, while most automakers struggle to top 10%.
Much of Ferrari's profitability is driven by its sky-high price tags, made possible by the exclusivity that comes with selling only thousands of vehicles per year (13,221 vehicles in 2022), compared to the millions that some mainstream auto companies sell globally.
Moreover, Ferrari's target audience is an ultra-wealthy group of consumers that are less impacted by economic downturns, making its business more stable than mainstream automakers that are heavily impacted by economic cycles.
And while Ferrari is often overlooked, its stock has quietly outperformed more well-known automakers over the past three years -- by a large margin.
Ferrari certainly fits the bill as an overlooked gem, and one that savvy investors should consider buying for the long haul.
The next big EV company?
The world is transitioning to electric vehicles (EVs), and just about any investor would love to find the next Tesla-like high-flying stock. While that's far easier said than done, Rivian Automotive(NASDAQ: RIVN) has quietly been putting together a solid 2023.
The maker of electric SUVs and trucks disappointed investors with a production slowdown in early 2023, but after the company adjusted assembly line production, deliveries have bounced back nicely, and the gap between production and deliveries continues to narrow, suggesting that demand remains strong.
Data source: Rivian. Chart by author.
Rivian has also increased its full-year production guidance two quarters in a row. It now sits at 54,000 -- up from 24,000 in 2022 -- which could prove conservative by year-end. Further, management improved its guidance for full-year adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and reduced its capital expenditure guidance during the third quarter.
As Rivian quietly bounced back with production improvements, the company was also transforming its supply chain and reducing labor, overhead, inventory, and logistics costs to improve gross profit per unit by roughly $2,000 during the third quarter 2023, compared to the second quarter. There should be even more benefits to those cost reductions in the coming quarters.
While Rivian remains a young company burning through cash, its net cash used in operating activities declined during the third quarter to $877 million, compared to the year-ago period's $1.37 billion -- and it has a $9.13 billion cash pile to fund its operations.
Finding the next Tesla won't be easy, but as mass adoption takes place for EVs, Rivian is making a lot of smart moves and selling in historically more profitable SUV and truck segments.
A well-connected company
It wouldn't take more than a presentation or two from Aptiv(NYSE: APTV) to overwhelm many investors, so let's simplify the company's many ambitions.
Consider Aptiv a company that produces technology, products, and solutions that align with automotive megatrends such as safety, a future with zero emissions, and seamless connectivity. Essentially, Aptiv is a technology company that will foster the growth of autonomous vehicles in smart cities, and plans to expand into adjacent markets where applicable.
Year to date, Aptiv's revenue has jumped 18% over the prior-year period to $15 billion, while the company generated $1.27 billion from operations. It returned nearly $100 million to shareholders through buybacks, leaving roughly $1.9 billion available for future share repurchases.
Aptiv's many complicated acquisitions and technologies might turn some investors away, but the company remains uniquely positioned to thrive in the decades ahead as the automotive industry transitions to electric and increasingly connected vehicles and autonomous driving technologies.
Worth a look
Many investors overlook Ferrari due to its being in the capital-intensive auto manufacturing business, Rivian as it trails Tesla's lofty production numbers, and Aptiv due to its complexity. However, these three often overlooked stocks are tantalizing hidden gems in the stock market, and could drive your portfolio higher in the decades ahead as the automotive industry is on the cusp of massive evolution toward a safer, cleaner, and more connected future.
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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Aptiv Plc, Porsche Automobil Se, Tesla, and Volkswagen Ag. The Motley Fool recommends Bayerische Motoren Werke Aktiengesellschaft, General Motors, and Stellantis and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
