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Harvey: Pain or Gain Ahead for Auto Stocks and ETFs?

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As Hurricane Harvey continues to wreak havoc in Texas, raising the level of floodwaters, market watchers are coming up with newer economic and corporate impacts. The tropical storm is expected to be heading offshore in the Gulf of Mexico before recharging in southeast Texas, on Wednesday.

As per Bloomberg, loss estimates for Harvey is varying widely, but an insurance analyst at Imperial Capital projects it to be $100 billion. Before this, Hurricane Katrina cost the U.S. about $118 billion while Hurricane Sandy ended up hitting the country by about $75 billion.

Refiners’ haven Texas saw their oil industry getting crippled thanks to Harvey, flood insurers turned soggy, and home improvement retailers rejoiced on the need to re-arrange houses. Now, another important corner of the economy — auto sales — comes in the spotlight (read: Hurricane Harvey Puts These ETF Areas in Focus).

Hurricane Harvey Crashes into Auto Industry

The auto industry is in a tight spot for a few reasons as Harvey came lashing. As per an article published on CNBC, several auto dealerships have been shut down in this hurricane-prone area. Vehicle imports have almost been held up.

 If these were enough, Hurricane Harvey dented thousands of new vehicles that were in dealership lots, according to a new analysis from Edmunds. These new cars and trucks perhaps “have to be scrapped” as per the CEO of AutoNation.

The car-shopping website estimates that Harvey affected 366,000 new vehicles across Texas and several of these are high-profit trucks and SUVs, causing trouble for automakers, as per the source. This is especially true given Texas is the second-largest market for U.S. auto sales, making up about 9% of all retail states.

In fact, Texas is the top sales market for Ford (F - Free Report) , General Motors’s (GM - Free Report) GMC and Cadillac, Fiat Chrysler’s (FCAU - Free Report) Ram and Mitsubishi brands, as per an article published on Fox Business (read: ETFs in Focus Post Automobile Earnings).

CNBC went on to note that Houston – ravaged by Harvey – is a key contributor to Texas auto sales, accounting for about 40% of total, with over 500 dealerships.

Since vehicles inventory will now be heavily hurt, potential sales for August will likely be 2% less, as per Edmunds. Sales decline could run into early September too. A Citi analyst reduced his estimate for the rate of monthly auto sales in August. He foresees Harvey messing up about 125 counties in Texas and about 60% of the state's auto sales.

And AutoNation’s CEO estimates that “Harvey disruptions will reduce the overall auto industry August sales rate by between 100,000 and 300,000 units.”

What Lies Ahead for Auto Sector?

Having said that, we would likely to note that this could be a short-term drag in sales as buying will pick up over the long term. AutoNation’s CEO also emphasized that "there will be a substantial snapback either in the fourth quarter or the first quarter of next year because that's the American way. We rebuild."

ETF and Stock Impact

Overall, we see a neutral impact on the auto industry as losses incurred now will likely be more than mitigated by the pickup in future sales. So, investors having a strong stomach for risks may shop auto ETF First Trust NASDAQ Global Auto ETF (CARZ - Free Report) (see all Consumer Discretionary ETFs here).

The fund has a global exposure, which gives certain protection against a U.S.-specific deterrent like Harvey. This fund holds about 34 auto stocks. General Motors, Toyota Motor (TM - Free Report) , Daimler AG, Honda Motor (HMC - Free Report) and Ford Motor take the top five positions in the fund, with weights ranging from 7.46% to 8.05%. In terms of country exposure, Japan takes the top spot at 34.9% while the U.S. and Germany round off the next two spots with 21.8% and 18.5% share, respectively (read: 4 Japan ETFs to Scoop Up Now).

Auto Replacement Parts to Soar?

Since the need for parts replacement will be higher after Harvey’s passage, companies like Douglas Dynamics Inc. (PLOW - Free Report) , Motorcar Parts of America Inc. (MPAA - Free Report) and SPX Corporation (SPXC - Free Report) should profit in the near term.

Auto Retailers: Near-Term Pain, Long-term Gain?

Needless to say, auto retailers that sell new and used vehicles, replacement parts, offer vehicle maintenance, warranty, and repair services, and arrange related financing and insurance for its automotive customers, may feel the pinch now but see higher sales in the upcoming quarters. This puts stocks like Lithia Motors Inc. (LAD - Free Report) and Rush Enterprises Inc. (RUSHA - Free Report) in focus.

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