Thanks to high consumer confidence and low unemployment, the auto industry has proved resilient so far in 2018, dodging the negative impacts of higher gas prices, rising interest rates and tariff threats. Auto sales rose 1.8% from the year-ago level in the first six months and 5% in June according to Edmunds.com (read: Trade, Fed & Oil Wrote Top ETF Stories of 1H).
Of the six major American and Japanese automakers, Fiat Chrysler (FCAU - Free Report) and General Motors (GM - Free Report) have led the way this year with their auto sales up 4.5% and 4.2%, respectively. Toyota (TM - Free Report) also posted an increase of 3% while sales at Nissan Motor (NSANY - Free Report) , Ford Motors (F - Free Report) and Honda (HMC - Free Report) declined 4.8%, 1.8% and 0.5%, respectively.
Consumers have long been shifting from traditional passenger cars in favor of larger and more comfortable pickup trucks, SUVs and crossovers. But the number of new models is now growing faster than demand, threatening the fat profits that automakers have enjoyed over the past several years. Additionally, higher rates have made financing of new vehicles expensive.
Further, the potential tariffs on cars and auto components are the greatest threats to the auto industry. Per Cox Automotive, rising interest rates coupled with possible tariffs could raise new vehicle prices and payments, and cut into auto sales in the second half. Still, given the fact that automakers are willing to spend to keep their share of the market, Cox analysts raised their full-year forecast by 100,000 vehicles to 16.8 million.
Global Automakers President and CEO John Bozzella warned “tariff hikes would raise prices, make it more expensive to produce cars and trucks in the United States. He said the tariffs could cause a slowdown in sales and production, which would not be good for either American consumers or autoworkers.”
The Trump administration has already imposed tariffs on steel and aluminum imported from Europe, Canada and Mexico and is conducting another national security study that could lead to tariffs on European imports of cars and car parts. Both sets of tariffs may deal a big blow to the industry as these would increase the cost of auto production (read: 5 Sector ETFs Most Exposed to Trade Tensions).
While this year has been a challenging one, a strengthening economy, low unemployment, increasing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and robust demand for larger vehicles will continue to fuel the industry. In addition, tax cuts are providing some lift to consumers’ spending power, leading to higher demand for vehicles.
Further, the auto sector has a compelling valuation with a P/E ratio of 10.13, the lowest of all the 16 Zacks sectors. This could provide an upside to the stocks this year. That said, we have highlighted a few ETFs & stocks that could be attractive picks.
First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report)
This fund offers pure play global exposure to 34 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is moderately concentrated on the firms, with each making up for no more than 8.6% share. In terms of country exposure, Japan takes the top spot at 35% while United States and Germany round off the next two spots with 22.3% and 18.5% share, respectively. CARZ has a lower level of $18.4 million in AUM and trades in a small average daily trading volume of about 5,000 shares. The product charges 70 bps in fees per year and carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (see: all the Consumer Discretionary ETFs here).
iShares Global Consumer Discretionary ETF (RXI - Free Report)
While RXI provides broad exposure to the consumer discretionary space around the world, investors could go for this product as it has about 19% allocation to the auto industry. Holding 175 stocks, the fund is skewed toward the top firm at 14.6%, while the other firms hold less than 4.8% share. American firms make up for 63.3% of the portfolio while Japan takes the next spot at 13.1%. It has $296.2 million in AUM and charges 48 bps in annual fees. Average daily volume is light at around 19,000 shares.
Meritor Inc. (MTOR - Free Report)
Based in Troy, MI, Meritor is engaged in designing, developing, manufacturing, marketing, distributing, selling, servicing, and supporting integrated systems, modules, and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation, and industrial sectors. The stock has seen solid earnings estimate revision of 10 cents in the past 90 days for this fiscal (ending in September 2018) with an expected earnings growth rate of 49.47%. It sports a Zacks Rank #1 (Strong Buy) and has a VGM Style Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Visteon Corporation (VC - Free Report)
Based in Van Buren Township, MI, Visteon operates as an automotive supplier engaged in the design, engineering and manufacturing of innovative climate, electronic, interior and lighting products for vehicle manufacturers. The stock has seen solid earnings estimate revision of 37 cents over the past 90 days for this year with an estimated earnings growth rate of 13.17%. It has a Zacks Rank #2 (Buy) with a VGM Score of A.
American Axle & Manufacturing Holdings Inc. (AXL - Free Report)
Based in Detroit, MI, American Axle is a premier, global leader in design, engineering, validation and manufacturing of driveline, metal forming, powertrain, and casting technologies for automotive, commercial and industrial markets. The stock has seen positive earnings estimate revision of 27 cents over the past 90 days for this year and has an expected earnings growth rate of 2.40%. It has a Zacks Rank #2 with a VGM Score of B.
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