UBS says buy these 8 auto stocks now before a rally next year

Published Mon, Oct 18 20217:17 PM EDT

Lucy Handley @in/lucy-handley-b2b0a61a/@lucyhandley

Analysts at UBS say the auto sector is about to rebound and have named eight stocks to buy — adding that the market has "totally underestimated" earnings growth for the next year. Car production was down 18% year-over-year in the third quarter due to a semiconductor shortage , the analysts led by Patrick Hummel wrote in an Oct. 8 research note — chips are used in many auto parts, from entertainment systems to power steering. However, the bank's analysts expect a recovery next year: "The low point in the global production run-rate is possibly already behind us … and car demand still greatly exceeds supply. Time to increase the exposure to auto stocks," the analysts stated. While the bank said third-quarter results "will be bad" — automakers started reporting earnings this month — next year's will improve significantly, it said. "2022 earnings growth looks totally underestimated by consensus. We forecast 15% global production growth in 2022 to 88m cars ... autos will likely be amongst the sectors with the highest earnings momentum over the next 12m," they added. UBS is buy-rated on the following stocks: Renault , which the bank expects to have "further group margin momentum towards 4.5-5% helped by costs savings and product mix next year." Tire company Michelin . "Michelin has limited exposure to the current chip shortage risk. Further, the company should benefit from higher prices," the analysts stated. Parts supplier Faurecia , which is set for "strong outperformance" for full-year 2021. Gestamp , a Spanish autoparts maker. "We anticipate a constructive tone from management for FY [financial year] 2022," the analysts stated. Stellantis , which UBS expects to announce a "rock-solid" outlook for its North America business. "Against the backdrop of tight supply and the positive impact from merger synergies, we think Stellantis had no big difficulty to deal with higher commodity prices, and we expect Stellantis to maintain its high level of profitability," the analysts stated. Auto supplier Valeo . The bank lowered its earnings estimates for 2021 due to reduced global production levels, but said it expects a "sharp" growth in EBIT margin next year. Volkswagen . UBS said it is "still on track" for a 6% to 7.5% operating margin for 2021 and has a "strong" order backlog. Daimler , which the bank said has a "strong" outlook for 2022. It has a "compelling" strategy for luxury electric vehicles, analysts added. The bank is neutral-rated on Tesla , which delivered 241,300 electric vehicles in the third quarter. "Order books are fully covered well into next year. We raise our 2021 delivery estimate to 894k (from 860k), which implies another delivery record in Q4 or 267k vehicles," the analysts said.

An automotive production line.

Monty Rakusen | Image Source | Getty Images

Analysts at UBS say the auto sector is about to rebound and have named eight stocks to buy — adding that the market has "totally underestimated" earnings growth for the next year.