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Auto Industry Stock Outlook - December 2017

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Despite sales rising in September and November, the auto industry has yet to match the bullish run of the previous two years. As compiled by Autodata, in the first 11 months of 2017, total light vehicles’ sales declined 1.5% compared with the first 11 months of 2016.

Notably, in 2016, auto sales registered a record high. Since the comparison is with a record-setting year, it can be said that, if not spectacular, auto sales have been solid so far in 2017.

In September, U.S. auto sales increased 6.1%, being driven by higher demand from the hurricane-affected regions, where residents looked to replace damaged vehicles.

Autodata further revealed that in the first 11 months of 2017, sales of passenger cars witnessed a 10.3% decline, whereas in the same time frame, sales of light trucks grew 4.6%. Here, it is to be noted that large U.S. auto sales comprise truck sales. In fact, a continued rise in U.S. truck demand is a positive development from investors’ angle despite weakness in small car sales. Moreover, rising demand for profitable crossovers, sports utility vehicles and pickups are also aiding the auto industry.

Parallel to the usual ups and downs in the conventional auto space, the year so far has seen heightened activity by global automakers in the electric vehicles (EVs) and autonomous driving space. Particularly China, the largest auto market in the world, is fostering EV adoption. The country set new regulations in September that requires EVs to account for up to 8% of new vehicle sales by 2020.

However, for U.S. automakers, entering China would require either the acceptance a 25% tariff or partnering with a local company that could in turn out to be a serious competitor. In recent times, General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) have added some new EVs to their individual lineup. German auto major Volkswagen AG (VLKAY - Free Report) is also committed to introduce new energy vehicles in China. Other automakers are also following suit.

Zacks Industry Rank - Positive Outlook

The typical characteristics of the auto industry prompted us to have a dedicated sector for the industry in our database. The automobile sector is one of the 16 Zacks sectors, unlike the S&P classification, wherein autos is part of the Consumer Discretionary sector. The S&P has 10 sectors compared with the 16 sectors for Zacks.

At the expanded classification level, the Zacks Auto sector is divided into six industries: Auto–Domestic, Auto–Foreign, Auto–Original Equipment, Auto–Replacement Parts, Auto–Internal Combustion Engines and Rubber–Tires. The level of sensitivity and exposure to the different stages of the economic cycle vary for each industry.

We rank over 250 industries in the 16 Zacks sectors, based on the earnings outlook and fundamental strength of the constituent companies in each industry. We put our industries into two groups the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. (To learn more visit: About Zacks Industry Rank.)

The current Zacks Industry Rank is 51 for Automotive–Domestic (placing it at the top 20% of the 250 plus Zacks classified industries), 94 for Automotive–Foreign (placing it at the top 37% of the 250 plus Zacks classified industries), 74 for Automotive–Original Equipment (placing it at the top 29% of the 250 plus Zacks classified industries), 245 for Automotive–Replacement Parts (placing it at the bottom 4% of the 250 plus Zacks classified industries), 3 for Automotive–Internal Combustion Engines (placing it at the top 1% of the 250 plus Zacks classified industries), 247 for Rubber–Tires (placing it at the bottom 4% of the 250 plus Zacks classified industries).

Looking at the exact location of these industries, one could say that the general outlook for the auto industry is Positive.

Sector-Level Earnings Trend

The auto sector is expected to contribute 2.0% to the total S&P 500 earnings in 2017. This is nearly double its 1% market-cap weight in the index at present.

Looking at the third-quarter 2017 results of the auto sector, earnings decreased 0.4%. Auto sector earnings are expected to rise 11.1% in the fourth quarter of 2017 but projected to decline 1.9% in first-quarter 2018.

Total revenues declined 6.3% year over year in third-quarter 2017. Revenues are expected to decline 5.3% in the fourth quarter of 2017 but increased 3% in first-quarter 2018.

Earnings for 2017 are expected to decline 1.7% from 2016. Also, revenues for the year are expected to decrease 5.1%. Again, earnings for 2018 are expected to decline 2.5%, while revenues are projected to rise 0.7%.

For more information on earnings for this sector and others, please read our latest Earnings Trends report.

Bottom Line

The auto sector currently has ample opportunities amid serious challenges. While robust demand for trucks, attractive financing options and impressive vehicle launches are driving sales, rising auto loan defaults and high levels of safety recalls are acting as dampeners.

At this juncture, we recommend stocks such as Allison Transmission Holdings, Inc. (ALSN - Free Report) , AB Volvo (VLVLY - Free Report) and Wabco Holdings Inc. (WBC - Free Report) . While Allison Transmission and Volvo sport a Zacks Rank #1 (Strong Buy), Wabco Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission has a long-term growth rate of 10%. Shares of the company have gained 22.5% year to date.

Volvo has a long-term growth rate of 15%. Shares of the company have gained 59.3% year to date.

Wabco Holdings has a long-term growth rate of 15%. Its shares have rallied 32.3% year to date.

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