The U.S. economy has sprung back to life after GDP growth rebounded in the second-quarter. According to the “advance estimate” by the Bureau of Economic Analysis, second quarter output of goods and services increased at an annual rate of 4%.
This rise was in sharp contrast to first quarters’ decline of 2.1%. The first-quarter contraction was for the first time in three years. Harsh winter weather was cited for hampering business operations and slowing down construction.
Second-quarter GDP increased above the economy’s growth potential, which analysts believes to be between 2% and 2.5%. The GDP growth was fueled by improved consumer spending. Real personal consumption expenditure (PCE), which accounts for almost two-thirds of the U.S. economy, accelerated 2.5% in spring.
PCE is made up of expenditure on durable and non-durable goods. Durable goods jumped 14% in the second-quarter, more than the 3.2% increase in first quarter. One of the major components of durable goods – auto and auto parts – significantly contributed to the growth story.
Let’s see how the Auto industry is progressing:
Impressive Growth Trends
The auto industry added 0.42% of annualized growth to 4% second-quarter GDP. This is a far better performance when compared to contributions to second-quarter GDP growth in the last three years – positive 0.01% in both 2012 and 2013, and negative 0.52% in 2011.
U.S. auto sales have shown impressive growth over the past few months. Light-vehicle sales improved 4% year over year to 8.17 million units in the first half of 2014. Sales on a seasonally adjusted annualized rate (SAAR) basis increased to 16.8 million units in May 2014 from the year-ago level of 15.5 million units.
May SAAR is the highest since July 2006. Sales on a SAAR basis reached the 17 million mark in June 2014 for the first time since July 2006. In July 2014, sales on a SAAR basis increased to 16.5 million units from the year-ago level of 15.8 million units.
Sales figures of major automakers were promising in the second-quarter 2014. General Motors (GM - Analyst Report) recorded vehicle sales of 284,694 in May (up 13% year over year), 267,461 in June (up 1%) and 256,160 in July (up 9%). 2014 marks the company’s best July sales since 2007.
Ford Motor Co. (F - Analyst Report) reported a 3% increase in total sales from the year-ago period to 254,084 vehicles in May 2014, while sales declined 6% year over year to 222,064 vehicles in June. The company again bounced back in July with 10% year-over-year increase in sales to 212,236 vehicles. This marks its best July sales in 8 years.
Sales figures of Chrysler Group controlled by Italy’s Fiat S.p.A and Japanese Automakers such as Toyota Motor Corp. (TM - Analyst Report) and Nissan Motor Co Ltd. (NSANY - Snapshot Report) also climbed in all three months of the second-quarter.
Factors Contributing to Auto Sales Growth
Automakers are providing significant incentives to attract customers in order to boost sales. This is also leading to demand growth for auto parts. Further, higher age of vehicles on U.S. roads is resulting in demand for parts replacement.
While Incentives help boost sales growth, these might hurt margins. Incentives in the form of discounts led to a 2.2% sequential decline in the average transaction price for light vehicles to $30,575 in June, per TrueCar Inc. (TRUE - Snapshot Report).
Macroeconomic indicators such as upbeat consumer confidence data coupled with healthy and broad based private sector hiring also fueled growth in auto sales.
The encouraging economic indicators led banks to offer car loans with low interest rates and longer periods for repayment. That in turn boosted auto sales too. Low auto lending rates have propelled the total sum of loans to $902 billion as of July 2014 from $699 billion as of July 2011.
Auto Parts Manufacturers Set to Gain
The average age of a vehicle on U.S. roads is about 11.4 years. Moreover, according to IHS Automotive, the number of vehicles reached a record level of about 253 million or an increase of more than 3.7 million from last year. The U.S. auto industry hasn’t seen this level since 2004. Hence with more vehicles running on the roads along with many whose ages are a bit of a concern puts the auto parts industry in an advantageous position.
Given these encouraging factors along with pent-up demand in the first quarter, it can be concluded that auto industry is well positioned to show improvements in the upcoming quarters.
2 Auto Stocks to Buy Now
Toyota Motor operates with three business divisions – automobiles, finance and another segment focusing on housing, information and communications. The company recorded earnings of $3.64 per ADR in first-quarter fiscal 2015 (ending Jun 30, 2014). Earnings per ADR surpassed the Zacks Consensus Estimate of $3.07.
The Japanese automaker posted consolidated net income of $5.76 billion for first-quarter fiscal 2015, improving from $5.68 billion in the year-ago quarter.
Expected earnings growth rate for this Zacks Rank #2 (Buy) stock is 6.4%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.8, which looks attractive. In the last three months the stock gained almost 7%.
Gentex Corp. (GNTX - Snapshot Report) is an auto parts company that provides auto-dimming rearview mirrors with advanced electronic features.
The company reported adjusted earnings per share of 48 cents in the second quarter of 2014, in line with the Zacks Consensus Estimate. Adjusted earnings increased 33% from 36 cents in the second quarter of 2013.
Net income came in at $76.7 million in the second quarter of 2014, up 47% from $52.1 million in the second quarter of 2013.
Gentex expects net sales to increase 15–20% year over year in the third quarter of 2014. Gross profit margin in the third quarter of 2014 is expected to be approximately 39.5–40%.
Expected earnings growth rate for this Zacks Rank #2 stock is 25.4%. It also gives a decent dividend that yields 2.24%. It has an attractive P/E (F1) of 14.67.
With strong fundamentals and growth prospects, these two stocks are expected to show improved price performance in the near future. While most Auto stocks are expected to benefit from the industry’s progress supported by the economic recovery, the favorable Zacks Rank of these two stocks may ensure their outperformance.