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Auto Stock Roundup: Automakers to Initiate Talk With UAW, GPC to Buy Todd Group

Zacks Equity Research

Auto giants in Detroit are likely to initiate parleys with the United Auto Workers (“UAW”) on various contentious issues pertaining to rising healthcare expenses, hiring temporary workers and job security. The automakers are under huge pressure to raise their profit margin. Escalating costs associated with the development of autonomous and electric vehicles are further putting strains on these auto giants’ profit. Moreover, the sale of new vehicles is likely to decline in 2019 and 2020.  Given this situation, the discussion between UAW and Detroit-based automakers is of huge importance.

Daimler AG DDAIF lowered its profit forecast for the fourth time in 13 months. The German automaker issued an outlook based on huge costs involved in regulatory crackdown and recalls. The company decided to set aside more money to tide over the fallout on diesel emissions and airbag recalls.

Recap of the Week’s Most Important Stories

1.    Toyota Motor Corporation TM announced its plan to scrap the production of Corolla compact cars at its new factory under construction in Alabama. Instead, the company will manufacture a new sport utility vehicle (SUV) at the plant. The facility is being constructed in association with Mazda Motor Corporation in Huntsville.

The largest Japanese automaker took this decision in response to the shift of vehicle buyers in the United States from cars to SUVs, pickup trucks and crossovers. Per the company’s report for the first half of 2019, Corolla sales declined 5% to just 152,868, while overall Toyota car sales fell 8%. During the same period, U.S. SUV sales dipped 1%.

Production in the $1.6-billion Alabama plant is expected to start in 2021. The company has started hiring and the construction of the plant is on schedule. The plant is slated to hire up to 4,000 employees and build 3,00,000 vehicles on an annual basis. Among the U.S. states, Alabama is the fifth largest producer of light trucks and cars.

However, there are a few headwinds that can affect the plant. Sales in the U.S. auto industry witnessed a decline. New vehicle sales in the United States fell 2.2% in the first half of 2019. This is likely to put pressure on vehicle prices and aggravate the problem of overcapacity.

Nevertheless, the company still relies on its plants in Mississippi and Japan for the production of Corolla cars. (Read more: Toyota to Scrap Corolla and Build New SUV at Alabama Plant)

Currently, Toyota has a Zacks Rank #4 (Sell).

2.    Daimler lowered its profit forecast for the fourth time in 13 months probably due to costs involved in regulatory crackdown and recalls.

The luxury carmaker’s shares plunged after it announced expectations of lower pre-tax profits in 2019 from the 2018 level. Further, the company decided to set aside more money to tide over the fallout on diesel emissions and airbag recalls.

Daimler is setting a reserve worth 1.6 billion euros for ongoing governmental and court proceedings, and measures related to Mercedes-Benz Diesel vehicles as well as higher provision related to the recall of Takata airbags by 1 billion euros.

The warning does not bode well for the auto sector in Germany, which is likely to cause an economic slowdown. The company also faces lower demand for diesel vehicles in the U.K. and Europe. Further, Daimler’s confidence has been hit by an ongoing trade war as its vehicles are shipped from the United States to China.

An investigation is underway to check the carmaker’s diesel pollution levels. It has become a mandate for the company to clean combustion engines. This is likely to be a hurdle to its growth as it intends to make heavy investments in self-driving and electric vehicles. Moreover, sluggish growth in China along with weak demand in Europe is concerning automakers globally. (Read more: Daimler Gives Profit Warnings on Regulatory & Recall Costs)

Currently, Daimler has a Zacks Rank #5 (Strong Sell).

3.    Genuine Parts Company’s GPC wholly-owned automotive distribution company, Alliance Automotive Group (“AAG”), agrees to acquire Todd Group.

Alliance is a leading distributor of light and commercial vehicle parts. It also supplies different parts to garages for the repair and maintenance of vehicles from a wide network of stores and outlets.

France-based Todd Group is a distributor of truck parts and accessories for the independent heavy-duty aftermarket, and operates through a national network of 35 branches. The expected annual revenue generation from the business is $85 million.

The transaction is forecasted to close in the fourth quarter of 2019, subject to the satisfaction of customary closing conditions and applicable regulatory approvals.

The addition of Todd Group rightly complements Alliance’s network and helps Genuine Parts to expand its heavy-duty parts and services offering. Todd Group, with its rich history, is sure to build the company’s industry position as the largest distributor of heavy-duty parts in France.

Genuine Parts is expected to benefit from synergies and other attributes resulting from the acquisition. It is also likely to influence the company’s future operations, economic performance, financial condition, and demand for products and services in a favorable manner.

Genuine Parts currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

4.    Per Reuters, Ford Motor Company F and the UAW will initiate talks on a four-year contract on contentious issues. The discussion is likely to highlight rising healthcare expenses, hiring temporary workers and job security. Other automakers like General Motors Company GM and Fiat Chrysler Automobiles N.V. FCAU are also likely to begin discussions with the UAW.

Notably, Detroit-based automakers and the UAW last entered discussions in 2015 when the sale of new vehicles was witnessing an increase. However, new vehicle sales are expected to decline in 2019 and 2020. This implies that automakers are under tremendous pressure to raise their profit margin. Increasing expenses associated with the development of autonomous and electric vehicles are further putting strains on their profits.

General Motors has been facing union’s wrath since it announced the closure of five North America-based plants in late 2018. Condemnation persisted despite the auto giant’s efforts to create jobs at other plants for all the displaced workers. In February 2019, General Motors announced 1,000 new jobs at a plant in Michigan to manufacture heavy-duty pickup trucks.

UAW president Gary Jones stated, “There will be no more quiet closing of plants, no more shipping jobs to Mexico and abroad without a sound.”

Currently, Ford, General Motors and Fiat Chrysler each carries a Zacks Rank #3.

Performance

In the past week, all the stocks, except for Honda Motor Co., Ltd. HMC have gained. Tesla, Inc. TSLA has gained the most.

In the past six months, Tesla has declined the most while AutoZone, Inc. AZO recorded maximum gain.
 

Company Last Week Last 6 Months
GM 2.8% 1.5%
F 2.2% 20.4%
TSLA 6.7% -15.7%
TM 1.6% 3.2%
HMC -1.9% -13%
HOG 0.6% -4.2%
AAP 0.8% -5.9%
AZO 1% 37.4%

What’s Next in the Auto Space?

Watch out for the usual news releases over the next week.

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