Strong global sales volumes have been boosting the results of the auto sector. So far this year, the key auto markets of the U.S., China and Europe have reported strong sales volumes. High incentives and attractive vehicle launches are aiding sales. Moreover, low fuel prices are leading to elevated sales of higher margin vehicle segments, such as SUVs and light trucks, which are benefiting auto companies.
However, the negative impact of foreign currency translation remains a major headwind for the auto sector. Moreover, sales growth in Europe is expected to be slower this year, while passenger car sales in the U.S. are falling. Further, the massive volume of recalls due to defective Takata airbag inflators and the Volkswagen AG (VLKAY - Free Report) emission scandal will significantly inflate automakers’ expenses. Even with respect to the U.S. market, there are legitimate concerns that sales may have grown as much they could, with the industry’s best days now behind us.
Still, there are plenty of reasons to be optimistic on the broader auto industry for both the short and long term. Below, we discuss some of these key factors that should continue to drive the sector’s performance level in the near to medium term.
Strong Sales in China
Many automakers, including the likes of Ford Motor Co. (F - Free Report) and General Motors Company (GM - Free Report) , have been banking on strong sales growth in China to drive earnings over the next few years. Naturally, when auto sales in China started falling in mid-2015, concerns were raised. Fortunately, the situation started improving from September. Consequently, auto sales increased 4.7% year over year to a record 24,597,600 units in 2015. Sales of passenger cars increased 7.3% to 21.1 million units, crossing 20 million for the first time. However, sales of commercial vehicles declined 9% year over year.
This year, both passenger cars and commercial vehicles have been recording strong sales in China. Sales of passenger cars increased 6.7% year on year to 7.4 million units in the first four months of 2016, while sales of commercial vehicles increased 2.7% to 1.2 million units. Consequently, total automobile sales surged 6.1% year over year to 8.65 million.
Rising U.S. Sales
U.S. light-vehicle sales increased 1.1% in the first five months of 2016. Although the percentage of increase is low, sales volumes continue to be strong. Moreover, the rise is commendable given that sales hit an all-time record in 2015. Results were driven by low fuel prices, easy availability of credit, attractive incentives and economic stability.
Most analysts expect U.S. auto sales to improve further in 2016, driven by rising employment and personal income as well as low fuel prices. Moreover, the high average age of cars on U.S. roads should continue to boost replacement demand for cars as well as car parts. The average age is 11.5 years currently and is expected to rise 3% by 2020, according to forecasts by IHS Automotive.
This will benefit replacement parts manufacturers and retailers, apart from new vehicle manufacturers and retailers. Thus, the U.S. auto sector is set for another good year.
Sustained Recovery in European Union
New passenger car registrations in the European Union increased 8.5% to 5.1 million units in the first four months of 2016 per the European Automobile Manufacturer’s Association. All major markets posted strong growth during the period. Rising consumer confidence, good incentives, strong replacement demand and new product launches are giving a boost to sales.
Sales of passenger cars in the European Union turned around with a 5.7% year-over-year increase in 2014 that followed six years of decline. The recovery continued last year with a 9.3% year-over-year increase recorded in passenger car registrations. Sales are expected to improve further this year.
Low Gas Prices Drive Vehicle Sales
Although gasoline prices have shown small gains recently, they continue to remain significantly low. The low gas prices are benefiting automakers significantly. As fuel becomes more affordable, sales of gasoline-powered vehicles – especially the larger ones that carry a wider profit margin – get a boost.
Although sales of hybrids and electronic vehicles are suffering from this trend, the sales volume of such vehicles is significantly lower than gasoline-powered vehicles. Hence, the positive impact of low gas prices outweighs the negatives for the auto sector.
Attractive Vehicle Launches
Rising sales and intense competition are encouraging automakers to come up with new and attractive, technologically advanced vehicles to gain market share. Most automakers are also revamping their popular vehicles by adding new technologies and enhancing their visual appeal to refresh their sales.
These companies are also offering attractive optional features in vehicles to earn higher profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.
Focus on Vehicle Safety Beneficial for Parts Makers
Increasing focus on the safety of vehicles is benefiting parts manufacturers, specifically those dealing with automotive safety products. For example, last year, 10 major automakers agreed to offer automatic emergency braking (AEB) systems as a standard feature in all their vehicles in the U.S. Apart from ensuring better road safety, this move will also benefit auto parts manufacturers that produce AEB systems.
The scenario for 2016 looks favorable for the auto industry. According to IHS Automotive, global auto sales are expected to rise 2.7% to nearly 89.8 million units in 2016.
Check out our latest Auto Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.
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