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Steer Clear of The Car ETF After Mixed Auto Stock Earnings

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After a bleak start to the year, the U.S. auto industry has been seeing robust sales over the past few months. Bigger sales incentives and cheaper credit seem to be the main factors behind the uptick in sales. This in turn has increased the sector’s contribution to the economy.
However, the sector still needs to impress investors on the earnings front. This is especially true as earnings for the auto sector’s total market capitalization are down 7.7% from the same period last year. However, this is far better than the prior-quarter earnings fall of 22.1%.
Nonetheless, revenues have inched up marginally by 2.9% year over year, with just 20% beating revenue expectations (read: Are Auto ETFs Headed for Trouble Despite Robust July Sales?)
Most of the big auto companies including Ford Motor Co. (F), General Motors (GM) and Honda Motor (HMC) are down 4% to 6% following their earnings releases.
Below we have highlighted in detail the earnings of some of the major auto companies that have reported recently.
General Motors Earnings
The largest U.S. automaker missed our estimates on both fronts. The company posted a 31% year-over-year drop in earnings per share to 58 cents, missing the Zacks Consensus Estimate of 78 cents. Though revenues in the quarter grew 1.5% year over year to $39.6 billion, it lagged the Zacks Consensus Estimate of $40.8 billion.
The company’s bottom line was primararily impacted by recall related costs. GM expects to spend $400 million to compensate victims of ignition-switch defects.
Ford Earnings
This second-largest carmaker by sales reported a year-over-year drop in both earnings and revenues, though the company managed to beat our estimates on both counts. Earnings per share came in at 40 cents, down from 45 cents in the year-ago quarter, but ahead of the Zacks Consensus Estimate by 8%. Revenues in the quarter fell 1.3% year over year to $37.4 billion but managed to beat the Zacks Consensus Estimate of $36.71 billion.
Despite the drop in revenues and earnings, the company’s cost savings and increased efficiencies ensured quarterly profits in almost all the regions of the world, save South America. In fact, the company posted record quarterly profit in North America and its first quarterly profit in Europe in three years.
Ford affirmed its guidance for the year of a pretax profit of $7 billion to $8 billion (read: 2 ETFs in Focus on Tesla Earnings Beat).
Honda Earnings
Like the last quarter, Honda reported mixed first quarter fiscal 2015 results. It missed the Zacks Consensus Estimate for revenues, though it managed to beat on earnings. However, net sales grew 5.4% year over year due to higher revenues from the automobile and motorcycle businesses as well as favorable foreign currency translation effects.
For fiscal 2015, Honda expects revenues to increase 8.1% to ¥12.8 trillion.
Toyota Earnings
Toyota (TM) also reported mixed first quarter fiscal 2015 results beating on the earnings front, while missing the estimates on revenues. Cost containment strategies and favorable foreign currency impact caused the company’s operating income to inch up.
Given the mixed earnings reports from the major auto makers, these stocks could face some more volatile trading in the coming days (read: Protect Your Portfolio with These Multi-Asset Income ETFs).
As a result, the auto ETF – NASDAQ Global Auto Index Fund ((CARZ - Free Report) ) – which has a sizable exposure to the above mentioned stocks could see some rough trading in the days ahead too.
CARZ in Focus

The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 37 stocks in the basket and is highly concentrated in its top five holdings with 40% of assets going to these five firms.

The ETF has a definite tilt toward large cap stocks as these accounts for 89% of assets. Toyota occupies the top spot, followed by Ford, Honda and General Motors (see all Consumer Discretionary ETFs here).

In terms of country exposure, Japan takes the top spot at 35.7% while U.S. takes the second spot having 23.9% allocation.

The ETF has amassed $59.6 million in its asset base and sees light trading volume. The product seems to be slightly expensive with 70 bps in annual fees and has a dividend yield of 1.22%.
CARZ has lost more than 3% during the past two weeks and currently carries a Zacks ETF Rank #4 or Sell rating, suggesting that the product is expected to underperform the market in the coming months.
Additionally, both the U.S. and foreign auto industry has a poor Zacks Industry Rank coming in the bottom 37% to 39%, indicating rough trading ahead. 
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