After a weak start to the year, the U.S. auto industry saw a strong rebound in May with major automakers reporting first increase in vehicle sales for 2019.
Of the six major American and Japanese automakers, Toyota auto sales rose 3.2%, followed by increase of 2.1% for Fiat Chrysler FCAU and 0.1% for Nissan Motor NSANY. However, Honda Motors ( HMC Quick Quote HMC - Free Report) witnessed a 4.9% drop in car sales. Both General Motors GM and Ford Motor F report sales quarterly instead of on a monthly basis (read: Full-Blown Trade Spat: 5 Most-Vulnerable Sector ETFs & Stocks). A strong economy and upbeat consumer confidence fueled auto demand. Additionally, a strong labor market encouraged consumers to buy more vehicles. Boost in housing sales and lower lending rates will also drive demand for new vehicles. Further, the Fed’s dovish statement that it will not raise interest rates this year will lead more consumers to avail loans while buying homes. Notably, interest rates for new vehicles averaged 6.1% in May compared with 6.27% in April, according to data provided by Edmunds. The month-over-month change can likely be attributed to an increase in zero-percent finance deals in May. Challenges Ahead The strong trend might reverse with the latest tariff threats on Mexico by President Donald Trump. Trump threatened to slap tariffs on all goods coming from Mexico in a bid to curb illegal immigration. Washington will impose a 5% tariff from Jun 10 that will increase to 10% on Jul 1 if illegal migration across the southern border is not stopped. Levies will then rise by 5% each month up to 25% by Oct 1. The tariff will permanently remain at the 25% level until and unless the crisis ends (read: After China, US Hits Mexico With Tariffs: ETFs Under Threat). The move will hit a number of companies in the auto sector. This is because American carmakers have built vehicles in Mexico for years, taking advantage of its cheap labor, trade deals and proximity to the United States. Mexico is the world’s fifth-largest auto parts’ producer, and exports 90% of its auto parts to the United States, per the U.S. International Trade Administration. According to CNBC report, about 2.6 million vehicles were shipped from Mexico to the United States in 2018, almost double the 1.33 million vehicles imported in 2011. As a result, U.S. auto sales are expected to decline 2.5% from 2018 to about 16.9 million units in 2019, according to industry consultants J.D. Power and LMC Automotive. While this year so far 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 should continue to drive the industry. Moreover, the auto sector has a compelling valuation with a P/E ratio of 9.19, the lowest of all the 16 Zacks sectors. This could lead to an upside in auto stocks this year. That said, we have highlighted the pure play auto ETF & a few stocks that could be attractive picks: First Trust NASDAQ Global Auto ETF CARZ 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 8.5% share. CARZ has a lower level of $18.7 million in AUM and trades in a small average daily trading volume of about 6,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: Automobile ETFs in Focus Post Mixed Earnings). Meritor Inc. MTOR Based in Troy, MI, Meritor supplies drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. The stock saw no earnings estimate revision in the past 30 days for this fiscal (ending in September 2019) but has an expected earnings growth rate of 16.83%. It carries a Zacks Rank #2 (Buy) and has a VGM Score of A. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Cummins Inc. CMI Based in Columbus, Indiana, Cummins designs, manufactures, distributes and services diesel and natural gas engines, and powertrain-related component products worldwide. The stock has seen solid earnings estimate revision of 4 cents for this year over the past 30 days and has an expected earnings growth rate of 22.68%. It carries a Zacks Rank #2 and has a VGM Score of A. Dana Inc. DAN Based in in Maumee, OH, Dana is a provider of technology driveline, sealing and thermal-management products. The stock has seen positive earnings estimate revision of 5 cents for this year over the past 30 days and has an expected earnings growth rate of 12.12%. It has a Zacks Rank #2 and a VGM Score of B. Want key ETF info delivered straight to your inbox? Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>