Bank of America says buy these 3 automotive stocks set to outperform low second-quarter expectations as they mitigate chip shortages amid ‘impressive’ demand

  • Bank of America says the auto industry is about to outperform low earnings expectations.
  • Rising sales, strong margins, and new products are set to boost results, analyst John Murphy said.
  • Murphy laid out 3 buy-rated automotive stocks to invest in ahead of the upcoming earnings season.
  • See more stories on Insider’s business page.

Electric vehicles (EVs) have taken the automotive world by storm over the past few years, forcing manufacturers that would have never considered going electric in the past to pump billions into the space. And while Tesla still leads the pack in EV sales, other manufactures are stealing market share from Elon Musk’s EV powerhouse.

Despite the rise of EVs and a slew of new entrants to the automotive space, the industry as a whole has faced significant challenges since COVID-19 halted the world economy in early 2020.

Demand for new cars plummeted during the pandemic, and a global semiconductor shortage forced car manufacturers to temporarily pause production lines. On top of that, rising costs due to commodity inflation have affected automakers’ margins.

Bank of America automotive analysts led by CFA charterholder John Murphy said the upcoming quarter will be yet another challenging experience for car companies. Still, the analysts argued there are some bright spots that could lead top picks in the sector to outperform.

Murphy and his team noted there has been a significant recovery in demand for new vehicles as the economy reopens, which they expect will help lift quarterly results. The analysts also pointed out that manufacturers have been able to sustain a strong sales price/mix, which has helped offset rising costs from the chip shortage and allowed for improved margins.

In addition, Murphy said he expects automotive firms to beat the Street’s estimates “across the board” in the upcoming earnings season due, in large part, to low expectations and outlooks put into place in the first quarter.

He added that the semiconductor shortage, while destructive over the short term, has also created additional pent-up demand which will aid a multi-year recovery for carmakers.

In a note to clients on Friday, Murphy released revised earnings estimates for automotive companies based on “much stronger” fundamentals for the industry.

Below, Insider examines 3 buy-rated stocks from the analyst’s report that have “material room for upside” to their financial outlooks. Also included are the stocks’ tickers, price targets, the upside to those targets, and Bank of America’s bull case.

Murphy recommends using these stocks to take advantage of the automotive industry’s ongoing recovery and modernization. 

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