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Auto ETFs & Stocks Worth Buying Despite Weak April Sales

Sweta Killa
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The auto industry saw a lackluster start to the spring season as car sales dropped to an annualized 17.15 million units in April compared with 17.04 million units a year ago, according to Autodata.

Of the six major American and Japanese automakers, Nissan Motor NSANY led the slump, plunging 28%. Honda HMC, Ford Motors F and Toyota TM saw declines of 9%, 4.7% and 4.7%, respectively, while Fiat Chrysler FCAU auto sales rose 5%. Notably, General Motors GM will no longer provide monthly sales data (read: US Retail Rise: ETFs in Focus).

The dismal performance came on the heels of waning consumer demand after a long boom and intensified competition, which has led to more car production, resulting in increased inventory.

Challenges Ahead

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, Trump’s steel and aluminum tariffs may deal a big blow to the industry as these would increase the cost of auto production. Notably, the auto sector accounted for 26% of demand for steel in the United States in 2017, lagging the construction industry, which accounted for 40%, according to data provider Statista (read: China's $50B Tariff Backlash Puts These ETF Areas in Focus).

Weak earnings expectation is an added challenge as the sector is expected to post earnings decline of 2.5% for this year, following earnings growth of 2.9% last year.

Any Bright Spot?

A strong economy, low unemployment, increasing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and still-low financing rates and gasoline prices will fuel the industry. Though the tax reform will encourage rate hikes, it will provide a lift to U.S. car sales.

Further, the auto sector has a compelling valuation with a P/E ratio of 10.96, 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 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, with each making up for no more than 8.05% share. In terms of country exposure, Japan takes the top spot at 34% while United States and Germany round off the next two spots with 20.6% and 20.3% share, respectively. CARZ has a lower level of $20.5 million in AUM and trades in a small average daily trading volume of about 3,000 shares. The product charges 70 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).

Lear Corporation LEA

Based in Southfield, MI, Lear Corporation is a leading global supplier of automotive seating systems, electrical distribution systems and electronics. The stock has seen solid earnings estimate revision of 43 cents over the past 30 days for this year with an estimated earnings growth rate of 13.41%. It has a Zacks Rank #2 with a VGM Score of B.

Oshkosh Corporation OSK

Based in Oshkosh, WI, Oshkosh is a leading manufacturer and marketer of access equipment, specialty vehicles and truck bodies for the primary markets of defense, concrete placement, refuse hauling, access equipment and fire & emergency. The stock has seen positive earnings estimate revision of 43 cents over the past 30 days for fiscal year (ending September 2018) and has an expected earnings growth rate of 35.53%. It has a Zacks Rank #1 with a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

PACCAR Inc. PCAR

Based in Bellevue, WA, PACCAR 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 22 cents for this year over the past 30 days, reflecting year-over-year growth of 32.16%. The stock has a Zacks Rank #2 with a VGM Score of A.

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