Though the U.S. auto industry faced tough times given higher interest rates, rising vehicle prices and threats of global slowdown in 2018, it proved resilient by registering another year of strong sales. This is especially true as car sales rose 0.6% to 17.3 million vehicles. This marks the fourth year of auto sales exceeding 17 million, the longest such streak the industry has ever recorded (read: 10 Top-Ranked ETFs That Crushed the Market in 2018).
Sales got one-time boost from Trump administration’s tax overhaul, which gave consumers extra amount to spend on new cars. Additionally, higher rental sales, fuel-efficient and technologically enriched vehicles, cheaper gas prices, high consumer confidence, and 50-year low unemployment led to resiliency in the industry. While sales of small sport utility vehicles rose strongly last year, sales of most other types of vehicles were either down or up only slightly.
Of the six major American and Japanese automakers, Fiat Chrysler (FCAU - Free Report) is the only company that posted the sales increase of 9% last year. Other automakers recorded declines of 6.6% for Nissan Motor (NSANY - Free Report) , 3.5% for Ford Motor (F - Free Report) , 2.2% for Honda (HMC - Free Report) , 1.6% for General Motors (GM - Free Report) , and 0.3% for Toyota (TM - Free Report) .
What Lies Ahead in 2019?
This year is expected to be more challenging given the lingering U.S.-China trade woes and signs of global slowdown, which will continue weighing on demand. Additionally, the effects of the tax cuts, especially for businesses buying fleets of cars, are expected to wane this year. Interest rates are set to climb higher as the Fed foresees two rates hike this year, making financing of new vehicles more expensive (read: Trump-Jingping Truce to Boost These ETFs).
The shift in consumers, preference from passenger cars to larger and more comfortable pickup trucks and SUVs, as well as longer usage of vehicles will also be a drag on sales. Further, the attractive loan deals that many car buyers rely on have started to disappear given that interest-free loans accounted for just 5.5% of all finance plans offered by dealers in December 2018. This was the lowest level for December since 2005, according to Edmunds.
Given the challenges ahead, Edmunds predicts the industry would sell fewer cars at 16.9 million (below 17 million mark) in 2019. Though the auto sector belongs to the bottom 7% of the Zacks Industry Rank, its valuation looks appealing at the current level with a P/E ratio of 7.97 — the lowest of all the 16 Zacks sectors.
In order to tap the bargain price, investors could take a look to the pure play ETF & few stocks that could be attractive picks this year:
First Trust NASDAQ Global Auto ETF (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 in its basket, with each making up for no more than 8.73% share. CARZ has a lower level of $21.7 million in AUM and trades in a small average daily trading volume of about 6,000 shares. The product charges 70 basis points (bps) in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (see: all the Consumer Discretionary ETFs here).
BorgWarner Inc. (BWA - Free Report)
This Michigan-based company is a global product leader in clean and efficient technology solutions for combustion, hybrid and electric vehicles. It saw positive earnings estimate revision of a penny for 2019 over the past 30 days reflecting year-over-year growth of 5.62%. It has a Zacks Rank #2 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
PACCAR Inc. (PCAR - Free Report)
This Washington-based company is a global technology company that designs and manufactures premium quality light, medium and heavy duty commercial vehicles sold worldwide under the Kenworth, Peterbilt and DAF nameplates. It saw positive earnings estimate revision of 13 cents for this year over the past 60 days, reflecting year-over-year growth of 1.33%. The stock has a Zacks Rank #2 and a VGM Score of B.
Genuine Parts Company (GPC - Free Report)
This Georgia-based company is a distributor of automotive replacement parts in the U.S., Canada and Mexico. The stock has seen solid earnings estimate revision of 9 cents over the past 90 days for this year with an estimated earnings growth rate of 6.19%. It has a Zacks Rank #2 and a VGM Score of A (read: 4 ETF Gainers of 2018 That Can Keep Gaining in 1H19).
CarGurus Inc. (CARG - Free Report)
This Massachusetts-based company is an online automotive marketplace connecting buyers and sellers of new and used cars. It saw positive earnings estimate revision of 7 cents over the past 90 days for this year and has an expected earnings growth rate of 30.95%. It has a Zacks Rank #2 and a VGM Score of B.
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