Most automotive companies beat the Zacks Consensus Estimate for the quarter ending Dec 31, 2017. Strong sales of crossovers, sports utility vehicles (SUVs) and pickup trucks contributed to the rise in revenues for the auto companies. Per the latest Earnings Outlook, as of Mar 7, in fourth-quarter 2017, the auto companies recorded year-over-year earnings growth of 24.3%, while revenues were up 2.6%.
Of late, auto companies have been plagued with several challenges. The recent rise in interest rates and strict credit conditions resulted in declining sales for these companies in February. In fact, strong sales of crossovers and SUVs were inadequate to offset the decreasing sales from pickup trucks.
Also, the decision to raise tariffs against the usage of imported steel and aluminum might hamper profit margins for the automakers, which are heavily dependent on these metals. This initiative might help the ailing steel and aluminum industries revive growth but the U.S. automotive companies will lose their competitive edge over foreign automakers.
In the last three months, the Auto sector has underperformed the S&P 500 index. It has declined 1.4% against the S&P 500’s rise of 3.2%.
Some Bright Spots
However, growth opportunities for the auto sector have been opening up with vehicle model launches by automakers and overall improvement in the economy. The recent growth in employment creation and rise in workforce across low, middle and high-wage industries will lead to a hike in the spending ability of consumers, thus strengthening the economy. Furthermore, tax cuts by the Trump government are expected to benefit the broader economy in the coming quarters.
Moreover, per an updated outlook provided by the leading rating agency, Moody’s, the U.S. auto sales are projected to decline lesser than expected in 2018, driven by improving the economy and rising demand. The rating agency estimates a sale of 16.9 million light vehicles this year, against the December’s projection of 16.8 million unit sales.
Screening the Stocks
Overall, the auto sector has been bearish so far this year. Considering the challenges it has been facing, finding out the right stock is very important.
We have chosen few auto companies having the potential to provide better returns with the help of our VGM Score. A value stock implies stocks trading lower than its fair price or intrinsic value and thus, offers a significant upside potential. For this particular strategy, stocks with a VGM Score of A or B have been selected. Additionally, the screened stocks carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy).
Top-Ranked Promising Auto Stocks Ahead of Q1 Earnings: PACCAR Inc (PCAR)
Bellevue, WA-based, PACCAR Inc (NASDAQ:PCAR) is a leading producer of heavy-duty trucks and has substantial manufacturing exposure to light/medium trucks. In the recently-reported quarter, the company’s adjusted earnings came in at $1.18 per share, beating the Zacks Consensus Estimate of $1.12.
Also, PCAR stock has seen the Zacks Consensus Estimate for annual earnings being revised 0.76% upward over the last 30 days.
VGM Score #A
Zacks Rank #1
Top-Ranked Promising Auto Stocks Ahead of Q1 Earnings: Standard Motor Products, Inc. (SMP)
Long Island City, NY-based Standard Motor Products, Inc. (NYSE:SMP) engages in the manufacturing and distribution of automotive replacement parts in the United States. In fourth-quarter 2017, the company reported adjusted earnings of 54 cents per share, which surpassed the Zacks Consensus Estimate of 39 cents.
SMP stock has seen the Zacks Consensus Estimate for annual earnings being revised 2.4% upward over the last 30 days.
VGM Score# B
Zacks Rank #2
Top-Ranked Promising Auto Stocks Ahead of Q1 Earnings: Tenneco Inc (TEN)
Lake Forest, IL-based, Tenneco Inc (NYSE:TEN) offers replacement parts to the diversified auto market that includes light vehicle, commercial truck, off-highway equipment and the aftermarket. Few of its products are emission-control products and specialty vehicle applications, among others.
In the fourth quarter, TEN stock’s adjusted earnings per share came in at $1.89, outpacing the Zacks Consensus Estimate of $1.64. Also, the Zacks Consensus Estimate for annual earnings has been revised 1.2% upward in a month’s time.
VGM Score# A
Zacks Rank #2
Top-Ranked Promising Auto Stocks Ahead of Q1 Earnings: Allison Transmission Holdings Inc (ALSN)
Based at Indianapolis, IN, Allison Transmission Holdings Inc (NYSE:ALSN) is one of the largest manufacturers of commercial-duty automatic transmissions whose products are used in more than 100 countries.
In the fourth quarter, the company reported adjusted earnings per share of 81 cents, thus beating the Zacks Consensus Estimate of $59 cents. Moreover, ALSN stock has seen the Zacks Consensus Estimate for annual earnings being revised 24.6% upward in the last 30 days.
VGM Score# B
Zacks Rank #1
Along with beating the estimates, all the above-mentioned companies reported year-over-year growth in revenues in the last quarter. PACCAR topped the chart with revenue growth of roughly 34%, while Standard Motor recorded the least growth of 4.4%. Among the other two stocks, Allison Transmission and Tenneco recorded year-over-year revenue increase of 25.4% and 11%, respectively.
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