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Can CARZ ETF Gain Despite Mixed Auto Earnings?

Sweta Jaiswal, FRM
·5 min read

The coronavirus outbreak has affected production and sales of vehicles as carmakers had to shut down facilities in late March across the United States. The outbreak also slowed down the sector’s sales, with demand being hit hard by high unemployment rates. However, with many states having eased restrictions, automakers have restarted operations but under some restrictions for controlling the spread of infections. Moreover, the pandemic has resulted in changes in the demand and preferences of consumers who are currently showing more interest in purchasing their own vehicles, largely due to concerns about public transportation systems and willingness for road trips.

Against this backdrop, we take a look at some big automobile earnings releases and see if these can impact ETFs exposed to the space.

Earnings in Focus

On Oct 21, Tesla (TSLA) reported earnings per share of 76 cents for third-quarter 2020, beating the Zacks Consensus Estimate of 55 cents. This outperformance was driven by higher-than-expected revenues, which totaled $8.77 billion, beating the consensus mark of $8.23 billion. While the bottom line improved significantly from the prior-year quarter’s earnings of 37 cents per share, the top line recorded an increase of 39% year over year. During the third quarter, Tesla reported delivery and production of 139,593 and 145,036 vehicles, reflecting a year-over-year increase of 44% and 51%, respectively.

Tesla had cash and cash equivalents of $14.53 billion as of Sep 30, 2020, compared with $5.34 billion on Sep 30, 2019. Tesla maintains the target of 500K deliveries for full-year 2020. The construction of Model Y lines in Shanghai, Texas and Berlin gigafactories is on schedule, with deliveries expected to start in 2021. Deliveries for Tesla Semi are also expected to begin in 2021.

On Oct 28, Ford Motor Company (F) reported third-quarter 2020 adjusted diluted earnings per share of 65 cents, surpassing the Zacks Consensus Estimate of 22 cents. Moreover, in the prior-year quarter, adjusted earnings came in at 34 cents per share. This stellar performance can be attributed to higher-than-anticipated automotive sales in North America and Europe.

For the September-end quarter, the company reported adjusted EBIT of $3.64 billion versus $1.79 billion recorded in the corresponding period of 2019. The U.S. auto giant reported net profit of $2.39 billion, up significantly from the prior-year level of $425 million. Ford had cash and cash equivalents of $24.26 billion as of Sep 30, 2020, compared with $17.50 billion on Dec 31, 2019.

During the reported quarter, Ford generated automotive revenues of $34.71 million. The figure outpaced the Zacks Consensus Estimate of $32.70 billion and was higher than the prior-year quarter’s $33.93 billion.

On Nov 5, General Motors Company (GM) reported adjusted earnings of $2.83 per share in third-quarter 2020, outpacing the Zacks Consensus Estimate of earnings of $1.47. In the year-ago quarter, the company had recorded earnings of $1.72 per share. The company reported revenues of $35.48 billion, marginally up from the year-ago figure of $35.47 billion. However, the top line lagged the Zacks Consensus Estimate of $38.02 billion.

General Motors cash and cash equivalents were $26.9 billion as of Sep 30, 2020, compared with $19.1 billion as of Dec 31, 2019. The company recorded adjusted automotive free cash flow (FCF) of $9.1 billion in third-quarter 2020 versus positive FCF of $3.8 billion in the prior-year period.

On Nov 6, Honda Motor (HMC) reported earnings of $1.31 per ADR in second-quarter fiscal 2021 outpacing the Zacks Consensus Estimate of 58 cents led by higher-than-expected revenues. The company reported earnings of $1.04 per share in the year-ago quarter. However, Honda Motor reported revenues of $34.41 billion, surpassing the Zacks Consensus Estimate of $30.78 billion but declining 2% from the prior-year sales.

Consolidated cash and cash equivalents were ¥2.96 trillion ($28 billion) as of Sep 30, 2020. Long-term debt was ¥4.52 trillion ($42.8 billion). For fiscal 2021, the company projects sales and operating profit of ¥13.05 trillion and ¥420 billion, up from the prior estimate of ¥12.8 trillion and ¥200 billion, respectively.

On Nov 6, Toyota Motor Corporation (TM) reported second-quarter fiscal 2021 earnings of $3.15 per share, outpacing the Zacks Consensus Estimate of $1.54 led by higher-than-expected revenues. However, the bottom line declined from the year-ago earnings of $3.87. Consolidated revenues came in at $63.84 billion, outpacing the consensus mark of $62.21 billion. Nonetheless, the top line declined 11.3% year over year. Toyota had cash and cash equivalents of ¥5.5 trillion ($52.2 billion) as of Sep 30, 2020. Long-term debt amounted to ¥12.1 trillion ($115 billion). At fiscal second quarter-end, operating cash flow was ¥616 billion, down 32.3% year over year.

Automobile ETF in Focus

In the current scenario, we discuss the following ETF that has a relatively higher exposure to the companies discussed.

Second Trust NASDAQ Global Auto ETF CARZ

CARZ tracks the NASDAQ OMX Global Auto Index. It comprises 34 holdings with the above-mentioned companies carrying 29.6% weight. Its AUM is $36 million and expense ratio, 0.70%. The fund has gained 11.5% since Oct 21 (as of Nov 13) (read: Time to Rotate to Cyclical Sector ETFs?).

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