GKN plc (LSE:GKN), a GBP£7.21B mid-cap, is an auto company operating in an industry which is a major player in the economy due to its high commodity consumption. New growth opportunities in smart cars and software is not the traditional focus for most auto companies. Automobile analysts are forecasting for the entire industry, a positive double-digit growth of 13.79% in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the UK stock market as a whole. In this article, I’ll take you through the automobile sector growth expectations, and also determine whether GKN is a laggard or leader relative to its automobile sector peers. Check out our latest analysis for GKN
What’s the catalyst for GKN’s sector growth?
The increasing presence of tech firms in the auto industry cannot be overlooked or discounted by OEMs. These companies will likely prove to have an immense influence on the auto sector in the coming years, mainly because their skills and the industry’s needs align perfectly – they are proficient at seamlessly connecting components to create networks valued by consumers for the information, efficiencies, and experiences they deliver. Over the past year, the industry saw negative growth of -6.37%, underperforming the UK market growth of 11.51%. GKN leads the pack with its impressive earnings growth of over 100% last year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be -20.30% compared to the wider automobile sector growth hovering in the teens next year.
Is GKN and the sector relatively cheap?
The automobile sector’s PE is currently hovering around 25x, higher than the rest of the UK stock market PE of 18x. This illustrates a somewhat overpriced sector compared to the rest of the market. However, the industry returned a similar 14.00% on equities compared to the market’s 12.75%, potentially illustrative of a turnaround. On the stock-level, GKN is trading at a lower PE ratio of 15x, making it cheaper than the average automobile stock. In terms of returns, GKN generated 22.73% in the past year, which is 8.72% over the automobile sector.
What this means for you:
Are you a shareholder? GKN is an automobile industry laggard in terms of its future growth outlook. This is possibly reflected in the PE ratio, with the stock trading below its peers. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto GKN as part of your portfolio, or maybe increase your holding. If you’re bearish on the stock, now may not be the best time to sell!