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Auto Sales Ride on Strong Economy, Self-Driving Gathers Pace

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After a tepid start to 2018, major automakers reported robust sales in March. A strong jobs market and favorable tax measures spurred consumer demand, which in turn pushed up sales. The March sales upsurge is in contrast to what the auto industry witnessed in the past year.

In fact, in 2017, U.S. vehicle sales declined for the first time since the financial crisis. It slipped to 17.2 million from 17.55 million in 2016. Last year’s decline notwithstanding, the overall level of sales aren’t that far from all-time record levels.

Elevated consumer confidence, a strong job market, big discount and a growing U.S. economy have aided this rise. Even concerns over high interest rates and growing oil prices could not stop Americans from splurging on sport utility vehicles (SUVs) and pickup trucks. This has led to strong unit sales of SUVs, crossovers and pickup trucks.

Per Autodata, auto industry sales rose 2.5% to 1,653,529 while new vehicle sales gained 6% in March. Moreover, seasonally adjusted annual rate (SAAR) was 17.5 million in comparison to 16.8 million, a year ago. General Motors Company (GM - Free Report) posted a sales increase of 15.7% year over year to 296,341 vehicles.

This upside was attributable to the Chevrolet, GMC, Buick and Cadillac brands. Ford Motor Company (F - Free Report) announced a 3.5% rise in year-over-year sales to 244,306 vehicles, boosted by crossover and truck sales. Fiat Chrysler Automobiles N.V. (FCAU - Free Report) reported 13.6% growth in year-over-year sales to 216,063 vehicles in the United States.

There are also other reasons to be optimistic about the broader auto industry for both the short and the long run. Below, we highlight those that should drive the sector’s performance in the near to medium term.

Opportunities

Strong Economy & Elevated Consumer Confidence

According to a recent report by the Federal Reserve, unemployment has dropped from 10% in October 2009 to 4.1%. This is the lowest level in about 20 years. About 17 million jobs have been added through this expansion. The labor market has remained robust and is likely to also remain strong in the future.

Additionally, growing household wealth, stable income gains and elevated consumer confidence continue to support consumer spending. Also, fiscal sops and accommodative financial measures are aiding both household spending and business environments. These positive macroeconomic factors are likely to aid the U.S. auto sector at least in the near term.

Improved Global Auto Industry Outlook

Leading rating agency Moody’s has upgraded its outlook for the global auto industry from negative to stable. Improving business conditions have partly led to this rating upgrade. The rating agency has further added that it anticipates sales of cars, SUVs and light trucks to be higher this year than the previous projection.

In fact, prospects for growth are improving for the majority of the auto markets in the world. Moody’s anticipates 1.5% rise in sales for 2018, unchanged from its previous projection. In addition, the rating agency expects U.S. auto sales to shrink less in 2018 than its previous forecast.

Rising Vehicles Age in the United States

The increasing average age of vehicles on U.S. roads is adding to the replacement demand for cars as well as car parts. The steadily improving quality of vehicles is mainly behind this rise in average age of vehicles over time. According to IHS Automotive, as of 2016, the average age of light vehicles was 11.6 years, whereas it was 9.9 years a decade ago. Moreover, by 2021, around 81 million vehicles are expected to be over 16 years old compared with 62 million vehicles today. This will benefit replacement part manufacturers and retailers, apart from new vehicle manufacturers.

Huge Opportunities in Self-Driving Industry

Of late, the self-driving industry has been growing by leaps and bounds. In fact, a few cases of accidents have not deterred the confidence of the auto giants to enter into this field in a big way. Several leading automobile and technology companies have been pouring in a huge amount of money to develop the niche technology and raise their market share. Huge prospects of self-deriving vehicles to transform the auto industry and the transportation landscape have mainly resulted in this lofty investment.

Attractive, Tech-Savvy Vehicle Launches

In order to stay in competition, automakers have to constantly strive toward introducing new and attractive, technologically advanced vehicles. A majority of automakers are revamping their popular vehicles with new technologies and visual appeal. Features such as backup cameras, automatic emergency braking and in-car connectivity are common in most vehicle segments.

Bottom Line

The solid outlook for the economy is certainly a blessing for the auto sector, which is facing a myriad challenges. Moreover, given the rising thrust on the self-driving industry, the auto space is gradually moving toward a seismic shift.

At this juncture, we recommend stocks such as PACCAR Inc. (PCAR - Free Report) , Allison Transmission Holdings, Inc. (ALSN - Free Report) and Honda Motor Co., Ltd. (HMC - Free Report) , each carrying a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

PACCAR has an expected long-term growth rate of 9.8%. In the past year, shares of the company have gained 2.1%.

Allison Transmission has an expected long-term growth rate of 10%. In a year, shares of the company have returned 12.7%.

Honda has an expected long-term growth rate of 4.8%. In a year’s time, shares of the company have returned 18.6%.

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