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Automotive Stocks Rebound as Fed Rate-Cut Seems Imminent

Christopher Vargas

With President Trump cracking down on immigration and threatening to slap tariffs on Mexico if they do not oblige, automotive stocks have taken a hit recently, since they would be greatly impacted by the tariffs. President Trump threatened to impose a tariff of 5% on all Mexican imports if Mexico did not do more to prevent illegal immigration into the U.S. If the tariffs were enacted, they would go up incrementally to 25% by October.

With over $100 billion worth of automobiles and auto parts imported into the U.S from Mexico, stocks such as General Motors GM, Ford F, American Axel AXL, and Autoliv ALV would be impacted the most by the tariffs. Companies such as AutoZone AZO would also face negative consequences from tariffs like these as they would have to pass the price increases onto the consumer.

Job growth saw some unexpected deceleration on Friday, as only 75,000 jobs were created in the month of May. This job growth deceleration came despite the unemployment rate being at a 50-year low. The decline came as the second instance in four months that payrolls failed to increase by more than 100,000. Economists were looking for a payroll growth of 180,000, exhibiting just how much job growth has slowed down.

Stocks initially took a hit following the May jobs report, but eventually ended up rebounding as the news was taken as an indication that the Fed would surely end up cutting interest rates. Besides the weak job hiring report, the Fed had already issued a statement that it would act appropriately to secure the economy in the face of the trade war. With a Fed interest rate cut on the horizon, the following automotive stocks have been able to make a turnaround.

Ford

Ford is one of the biggest domestic automotive manufacturers, and shares saw positive movement in the aftermath of the hopes of a Fed interest rate cut. Ford sits at a Zacks Rank #2 (Buy), with a Style Score of A in Value. Its P/E ratio of around 7X forward earnings is low when compared to other car manufacturers in the industry, and its PEG ratio of 0.97 fortifies its value. Its dividend yield of 6.15% can appeal to investors looking for a solid dividend payout from their investment. Shares of Ford are up +27.45% YTD, and its estimated long-term EPS growth rate of 7.3% can appeal to investors looking for a sound long term addition to a portfolio.

AutoZone

AutoZone is the nation’s leading retailer and distributor of automotive replacement parts and accessories. They have stores throughout the U.S, Puerto Rico, Mexico, and Brazil. The company hit a 52-week high today, and the stock has nearly doubled in value in the past year; its 52-week low was $661.99 and has gone up as high as $1,111.11 today. This drastic growth earns the stock a Zacks Rank #2 (Buy), with a Style Score of A in both Growth and Momentum. It has an expected long-term EPS growth of +12.20% to go along with an EPS growth rate of +39.16% compared to last quarter. AutoZone has made a tremendous run in the past year and projections indicate the company can prolong its success.

Autoliv

Autoliv is a worldwide leader in automotive safety, manufacturing seatbelts, airbags, and other safety technology. The company has a vast array of product offerings for automotive safety. The stock currently holds a Zacks Rank #3 (Hold), as it has experienced some downfalls in the past year. Despite these setbacks, the company has a Zacks Style Score of A in Value. Its PE ratio of 9.87 and dividend yield of 3.76% can appeal to investors looking for fundamental value; Autoliv also has a Zacks Style Score of B in Growth.

During this current market climate, stocks such as Autoliv can expect to see a boost in their performance. In addition, Autoliv’s expected long-term EPS growth is 7.8%. Investors should also note that the company’s next earnings report date is set to be in late July, which is when the market is pricing a 95% chance of an interest rate cut. Autoliv has the opportunity to capitalize on an interest rate cut, and with the way things have gone lately, it seems like the company will get that opportunity.

 

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