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Auto Sector Flourishes with Record U.S. Sales, Strong Overseas
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Low fuel costs and improving macroeconomic factors helped the auto sector to record impressive volumes in 2016. While sales hit an all-time high in the U.S., China and Europe markets also reported strong volumes.
Another benefit of low fuel prices was the rise in sales of higher margin vehicle segments, such as SUVs and light trucks. No doubt, the sector was a strong performer with the Zacks Auto sector up 18.9% in the last year vs. a 20% gain for the S&P 500 index.
However, the sector is also facing certain challenges, the most significant being the massive recall volume, particularly due to defective Takata airbag inflators and the Volkswagen AG emission scandal. Moreover, sales growth in the U.S. is projected to slow down this year.
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 the key factors that should continue to drive the sector’s performance in the near to medium term.
OPPORTUNITIES
Record Sales in the U.S.
U.S.light-vehicle sales inched up 0.3% to 17.55 million units in 2016. Although the percentage of increase was low, sales volumes were the highest ever, surpassing the all-time record set in 2015. Moreover, this is the seventh consecutive year of increase in sales.
Results were driven by higher employment levels, low fuel prices, easy availability of credit, attractive incentives and economic stability. Product segments like trucks and utility vehicles continued to record strong sales.
Most analysts expect U.S. auto sales to remain strong in 2017, although volumes may be lower than 2016. Strong macroeconomic factors such as rising employment and personal income as well as low fuel prices will continue to drive sales. Moreover, sales of high margin product segments such as pickup trucks, SUVs and crossover vehicles are expected to remain strong this year.
Further, 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 increased to 11.6 years in 2016, according to IHS Automotive. 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 parts manufacturers and retailers, apart from new vehicle manufacturers and retailers.
Rising 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. Auto sales in the world’s largest automobile market 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.
In 2016, both passenger cars and commercial vehicles recorded strong sales in China. Sales of passenger cars increased 15.4% year on year to 19.1 million units in the first 10 months of 2016, while sales of commercial vehicles increased 4.6% to 2.92 million units. Consequently, total automobile sales surged 13.8% year over year to 22 million units.
Sustained Recovery in European Union
New passenger car registrations in the European Union increased 7.1% to 13.5 million units in the first 11 months of 2016 as 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.
Following six years of decline, sales of passenger cars in the European Union turned around with a 5.7% year-over-year increase in 2014. The recovery continued in 2015 with a 9.3% year-over-year increase in passenger car registrations. Sales are expected to improve further this year.
Low Gas Price
While gasoline prices have started rising again in recent months, they remain significantly below the levels attained in the 2011–2014 period. Low fuel prices are a major tailwind for automakers. As fuel becomes 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 suffer 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, Tech-Savvy 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 revive sales. Features such as backup cameras, automatic emergency braking and in-car connectivity are common in most vehicle segments.
In fact, automakers are offering attractive optional features in vehicles to scoop up more profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.
Bottom Line
The auto industry is benefiting from many favorable factors. According to IHS Automotive, global auto sales figures for 2016 are expected to come close to 90 million units, up 2.7% over 2015. Volumes are expected to be strong this year as well, driven by sturdy sales in key markets. This presents a good buying opportunity for investors with a longer-term horizon.
Some auto sector companies worth considering include Penske Automotive Group, Inc. (PAG - Free Report) , Fox Factory Holding Corp (FOXF - Free Report) and GKN plc .
Penske Automotive has an expected long term earnings per share growth rate of 8.2%. It recorded average earnings beat of 2.1% over the last four quarters. Penske Automotive carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Fox Factory carries a Zacks Rank #1. The company has an expected earnings growth rate of around 16.6% for the long term. Fox Factory posted positive average surprise of 13.8% over the last four quarters.
GKN holds a Zacks Rank #2 (Buy) and has a long-term growth rate of 6.3%.
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.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>
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Auto Sector Flourishes with Record U.S. Sales, Strong Overseas
Low fuel costs and improving macroeconomic factors helped the auto sector to record impressive volumes in 2016. While sales hit an all-time high in the U.S., China and Europe markets also reported strong volumes.
Another benefit of low fuel prices was the rise in sales of higher margin vehicle segments, such as SUVs and light trucks. No doubt, the sector was a strong performer with the Zacks Auto sector up 18.9% in the last year vs. a 20% gain for the S&P 500 index.
However, the sector is also facing certain challenges, the most significant being the massive recall volume, particularly due to defective Takata airbag inflators and the Volkswagen AG emission scandal. Moreover, sales growth in the U.S. is projected to slow down this year.
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 the key factors that should continue to drive the sector’s performance in the near to medium term.
OPPORTUNITIES
Record Sales in the U.S.
U.S.light-vehicle sales inched up 0.3% to 17.55 million units in 2016. Although the percentage of increase was low, sales volumes were the highest ever, surpassing the all-time record set in 2015. Moreover, this is the seventh consecutive year of increase in sales.
Results were driven by higher employment levels, low fuel prices, easy availability of credit, attractive incentives and economic stability. Product segments like trucks and utility vehicles continued to record strong sales.
Most analysts expect U.S. auto sales to remain strong in 2017, although volumes may be lower than 2016. Strong macroeconomic factors such as rising employment and personal income as well as low fuel prices will continue to drive sales. Moreover, sales of high margin product segments such as pickup trucks, SUVs and crossover vehicles are expected to remain strong this year.
Further, 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 increased to 11.6 years in 2016, according to IHS Automotive. 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 parts manufacturers and retailers, apart from new vehicle manufacturers and retailers.
Rising 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. Auto sales in the world’s largest automobile market 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.
In 2016, both passenger cars and commercial vehicles recorded strong sales in China. Sales of passenger cars increased 15.4% year on year to 19.1 million units in the first 10 months of 2016, while sales of commercial vehicles increased 4.6% to 2.92 million units. Consequently, total automobile sales surged 13.8% year over year to 22 million units.
Sustained Recovery in European Union
New passenger car registrations in the European Union increased 7.1% to 13.5 million units in the first 11 months of 2016 as 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.
Following six years of decline, sales of passenger cars in the European Union turned around with a 5.7% year-over-year increase in 2014. The recovery continued in 2015 with a 9.3% year-over-year increase in passenger car registrations. Sales are expected to improve further this year.
Low Gas Price
While gasoline prices have started rising again in recent months, they remain significantly below the levels attained in the 2011–2014 period. Low fuel prices are a major tailwind for automakers. As fuel becomes 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 suffer 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, Tech-Savvy 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 revive sales. Features such as backup cameras, automatic emergency braking and in-car connectivity are common in most vehicle segments.
In fact, automakers are offering attractive optional features in vehicles to scoop up more profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.
Bottom Line
The auto industry is benefiting from many favorable factors. According to IHS Automotive, global auto sales figures for 2016 are expected to come close to 90 million units, up 2.7% over 2015. Volumes are expected to be strong this year as well, driven by sturdy sales in key markets. This presents a good buying opportunity for investors with a longer-term horizon.
Some auto sector companies worth considering include Penske Automotive Group, Inc. (PAG - Free Report) , Fox Factory Holding Corp (FOXF - Free Report) and GKN plc .
Penske Automotive has an expected long term earnings per share growth rate of 8.2%. It recorded average earnings beat of 2.1% over the last four quarters. Penske Automotive carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Fox Factory carries a Zacks Rank #1. The company has an expected earnings growth rate of around 16.6% for the long term. Fox Factory posted positive average surprise of 13.8% over the last four quarters.
GKN holds a Zacks Rank #2 (Buy) and has a long-term growth rate of 6.3%.
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.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-hold tickers for the entirety of 2017?
Who wouldn't? As of early December, the 2016 Top 10 produced 5 double-digit winners including oil and natural gas giant Pioneer Natural Resources which racked up a stellar +50% gain. The new list is painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. Be among the very first to see it>>