ASX auto stocks have zoomed ahead of the market in the COVID-19 recovery trade but there's one group that's been left behind.
These stocks are also leveraged to the rebound in car sales – a theme that sent the Eagers Automotive Ltd (ASX: APE) share price and ARB Corporation Limited (ASX: ARB) share price soaring.
Car dealership Eagers Automotive raced ahead by 50% over the past year. Four-wheel drive accessories group ARB did even better. The ARB share price doubled in value over the same period.
ASX novated stocks next to be on upgrade cycle
But many investors seem to have overlooked ASX novated leasing stocks. The McMillan Shakespeare Limited (ASX: MMS) share price is trading flat while the Eclipx Group Ltd (ASX: ECX) added around 12%.
This valuation gap may not last, according to Morgan Stanely. It isn't only demand for cars that's driving its bullish take on the sector.
The broker believes ASX novated stocks are on the cusp of an upgrade cycle and they are sitting on undemanding valuations.
Regulatory risk drag is easing
"Regulatory risk has been an overhang on the novated group in recent years, but we see clarity," said Morgan Stanley.
"The passage of the deferred sales model legislation de-risks novated earnings and removes regulatory uncertainty."
The proposed legislation is unlikely to have a material impact on earnings of novated leasing companies.
3 drivers boosting the sector
Morgan Stanley highlights three factors that make the sector a buy. It noted that that car sales cycle is stabilising and starting to turn after three years of consecutive monthly declines. Car sales suffered its worst year in 17 years in 2020.
The sector is also trading on FY22 forecast price-earnings (P/E) of between 10 and 11 times. That's low given that earnings are recovering.
Finally, the broker thinks the recent earnings guidance provided by McMillan Shakespeare and Smartgroup Corporation Ltd (ASX: SIQ) marks the start of the earnings upgrade cycle for the sector.
If anything, Eclipx Group and SG Fleet Group Ltd (ASX: SGF) could issue a profit upgrade later this month.
ASX stocks to buy today
Morgan Stanley is recommending investors buy the ECX share price, MMS share price and SGF share price.
The broker rates the SIQ share price as "equal weight" (equivalent to a "hold").
