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Car ETF in Focus After Lackluster Auto Earnings

F HMC TM GM CARZ

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Though the third-quarter earnings season started on an upbeat note for the auto sector with General Motors Co. (GM - Free Report) and Ford Motor Co. (F - Free Report) reporting better-than-expected results, things started to go downhill as the season progressed. In fact, the auto sector has been one of the worst performers this earnings season.
 
As per our Earnings Preview report, the Auto sector reported one of the lowest growth rates this quarter with earnings declining 8.2% on lower revenues of 1.1%. Earnings and revenue beat ratios of 70% and 40%, respectively, were also unimpressive.

Weak U.S. sales for the third consecutive month in October, expenses related to safety recalls, foreign currency fluctuations in addition to Brexit-related uncertainties are some of the issues plaguing the industry. Below we have highlighted in detail quarterly results of some of the major auto companies (read: Auto ETFs to Watch on Dismal September Sales).
 
Auto Earnings in Detail
 
The largest U.S. automaker, General Motors’ adjusted earnings of $1.72 per share for the third quarter beat the Zacks Consensus Estimate of $1.44 by a wide margin. Earnings increased 14.7% year over year. Revenues in the reported quarter were $42.8 billion, up 10.3% year over year, beating the Zacks Consensus Estimate of $40.1 billion.
 
The second-largest carmaker in terms of sales, Ford Motor posted adjusted earnings per share of 26 cents in the third quarter, down 42% from the prior-year quarter but ahead of the Zacks Consensus Estimate of 21 cents. Revenues decreased 12.5% to $33.3 billion but surpassed the Zacks Consensus Estimate of $32 billion. The company reaffirmed its 2016 pre-tax profit guidance of around $10.2 billion, lower than $10.8 billion in 2015.
 
Japanese automaker, Honda Motor Co., Ltd. (HMC - Free Report) reported earnings per share of ¥98.26 (97 cents) in the second quarter of fiscal 2017 (ended Sep 30, 2016), up 38.6% from the year-ago quarter. The Zacks Consensus Estimate was of earnings of 59 cents per share. Consolidated net sales and other operating revenues went down 9.9% year over year to ¥3.26 trillion ($32.27 billion). The figure missed the Zacks Consensus Estimate of $33.88 billion. For fiscal 2017, Honda now expects revenues to decline 8.2% to ¥13.4 trillion ($132.52 billion) lower than previous guidance of ¥13.75 trillion ($130.95 billion).

Another Japanese automaker, Toyota Motor Corporation (TM - Free Report) posted earnings of $2.51 per ADR in its fiscal 2017 second quarter, beating the Zacks Consensus Estimate of $2.12. However, the company’s consolidated revenues fell 8.6% year over year to ¥6.48 trillion ($63.3 billion) and were below of the Zacks Consensus Estimate of $64.5 billion. Toyota reiterated its consolidated revenue guidance of ¥26 trillion ($252.4 billion) for fiscal 2017, which reflects an 8.5% decline from fiscal 2016.
 
While Ford and General Motors reported better-than-expected earnings and revenues for the reported quarter, Toyota and Honda reported mixed results. This puts the spotlight on the exclusive auto ETF, First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report) , which has a sizable exposure to the above mentioned stocks. CARZ lost almost 1.5% (as of November 8, 2016) in the last 10 days. Let us take a look at this ETF in detail (see all Consumer Discretionary ETFs here).

CARZ in Focus
 
This ETF tracks the NASDAQ OMX Global Auto Index, having exposure to automobile manufacturers across the globe. The product holds 33 stocks in the basket with Honda, Ford, General Motors and Toyota placed among the top five holdings with a combined allocation of more than 30% of fund assets. Other firms hold less than 5% of the assets.
 
In terms of country exposure, Japan takes the top spot at 36.334.9% while the U.S. takes the second spot with a 22.7% allocation. .Germany and China come next with a respective allocation of 19% and 7.5%.
 
The ETF is neglected with $21.7 million in AUM and sees light trading volume of around 5,800 shares. The product is a bit expensive with 70 bps in annual fees and currently has a Zacks ETF Rank #5 or ‘Strong Sell’ rating with a High risk outlook (read: CARZ ETF in Focus on Decline in Auto Sales in August)

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