The Auto sector started this earnings season on a somewhat weak note. Major S&P auto companies that have unveiled fourth-quarter results so far include Harley-Davidson, PACCAR, Ford, General Motors, Cummins and O’Reilly Automotive. U.S auto biggies Ford and General Motors reported tepid fourth-quarter results, with both earnings and revenues declining from the year-ago period. Earnings of the truck maker PACCAR, and engine and powertrain manufacturer Cummins also declined on a yearly basis. However, American motorcycle manufacturer Harley-Davidson and auto-parts retailer O’Reilly recorded higher year-over-year earnings in the fourth quarter of 2019.
Given this backdrop, let’s delve deeper to analyze the factors that might have affected the quarterly performance of automotive companies.
Factors Impacting the Sector’s Q4 Results
Macro-economic headwinds and other industry-related challenges are likely to have impacted the auto sector this earnings season. Automakers around the globe have been struggling with declining car sales amid economic slowdown concerns. China, the world’s largest auto market, witnessed a massive decline in vehicle sales during the quarter amid recession worries and trade-war tensions.
Indeed, U.S. GDP grew at an annualized rate of 2.1% in fourth-quarter 2019 buoyed by a strong labor market, soaring job growth and low unemployment. However, U.S. light vehicle sales in the fourth quarter fell 1.7% year over year to 42, 90,911 units.
Tougher emission woes, and shift toward electric and autonomous vehicles have changed the sector’s dynamics. Widespread usage of technology and rapid digitization resulted in fundamental restructuring of the automotive market. This is likely to have increased manufacturing vehicles’ costs, which are passed on to consumers, in turn denting demand.
Picture Thus Far
So far, 50% of the S&P sector components have reported quarterly numbers. Per the Earnings Trends report dated Feb 5, earnings and revenues of these firms declined 38.6% and 5.6% year over year, respectively. Among the auto firms that have posted quarterly results, 50% beat EPS estimates and 50% surpassed revenue estimates.
Looking at Q4 expectations as a whole and combining the actual results with estimates for the still-to-report companies, total earnings and revenues for the auto sector are expected to decline 58% and 10.4%, year over year, per the latest Earnings Preview. In fact, the auto sector’s earnings are likely to decline the most among all the 16 Zacks sectors.
Picking Prospective Winners for Q4
Clearly, challenges gripping the auto sector paint a gloomy picture for a number of industry participants this reporting cycle. Amid this backdrop, it is wise to select auto stocks that are well positioned to beat on earnings in their upcoming releases. However, with a wide range of auto firms thronging the investment space, it is by no means an easy task for investors to select stocks having the potential to deliver better-than-expected earnings.
While it is impossible to be absolutely sure about such outperformers, our proprietary methodology — Earnings ESP — makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The combination of positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with the above-mentioned combination, chances of an earnings beat are as high as 70%.
Bet on These 4 Stocks for Robust Returns
We have identified four auto stocks that are poised to trump earnings estimates in the fourth quarter.
BorgWarner Inc. BWA: Michigan-based BorgWarner is a global leader in clean and efficient technology solutions required for combustion, hybrid and electric vehicles. Global expansion efforts, innovative product launches, strategic collaborations and strong backlog are likely to have boosted the firm’s fourth-quarter results. It currently has a Zacks Rank #3 and an Earnings ESP of +0.75%. The Zacks Consensus Estimate for the quarter to be reported is earnings of $1.03 per share on revenues of $2.5 billion. The company is slated to announce quarterly results on Feb 13.
BorgWarner Inc. Price and EPS Surprise
BorgWarner Inc. price-eps-surprise | BorgWarner Inc. Quote
LKQ Corporation LKQ: LKQ is one of the leading providers of replacement parts, components, and systems that are required to repair and maintain vehicles.The firm, which is scheduled to announce quarterly results on Feb 20, has a Zacks Rank #3 and an Earnings ESP of +1.68%. The Zacks Consensus Estimate for the quarter to be reported is earnings of 52 cents per share on revenues of $3 billion. With growth in the U.S. used-car vehicle market, the company has been benefiting from increasing revenues from the North American segment. The firm’s strategic buyouts to expand geographic footprint, improve customer offerings and adopt new technologies are appreciable.
LKQ Corporation Price and EPS Surprise
LKQ Corporation price-eps-surprise | LKQ Corporation Quote
Visteon Corporation VC: Headquartered in Michigan, Visteon is a maker of cockpit electronics and connected-car technology. It currently has a Zacks Rank #3 and an Earnings ESP of +2.63%.The Zacks Consensus Estimate for the quarter to be reported is earnings of $1.57 per share on revenues of $745.4 million. Continued ramp-up of production of displays and digital cluster products bodes well for the company. The firm is slated to announce quarterly results on Feb 20.
Visteon Corporation Price and EPS Surprise
Visteon Corporation price-eps-surprise | Visteon Corporation Quote
Magna International Inc. MGA: Based in Aurora, Magna is a manufacturer and supplier of complete automotive components. The firm, which is slated to report quarterly results on Feb 21, currently carries a Zacks Rank #3 and has an Earnings ESP of +1.06%. The Zacks Consensus Estimate for the quarter to be reported is earnings of $1.32 per share on revenues of $9.19 billion. Program launches, and business expansion through joint ventures and hub openings are expected to have buoyed Magna's performance. Its focus on innovation, technology development, and rising demand for crossover & SUVs is expected to have aided its performance.
Magna International Inc. Price and EPS Surprise
Magna International Inc. price-eps-surprise | Magna International Inc. Quote
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