Auto Sales To Advance On Strong Economy, China Growth

Although 2017 has not been hunky-dory like the past few years, certain discernible positive trends cannot be overlooked. Strong demand for trucks, which constitute a significant part of U.S. auto sales, keeps this revolving industry’s hopes alive. Alongside, Americans’ preference for SUVs, crossovers and pick-ups are likely to keep the profit proposition intact.

In fact, in the first 11 months of 2017, total light trucks sales for General Motors Company (NYSE:GM) (GM) and Ford Motor Company (NYSE:F) (F) moved up 6.1% and 4% year over year respectively, per Autodata. The same trend has also been observed for American Honda Motor Co. Inc., Nissan North America Inc., Volkswagen (DE:VOWG_p) Group of America Inc. and many others.

There are also other reasons to be optimistic about the broader auto industry for both the short and the long run. Below, we highlight those that should drive the sector’s performance in the near to medium term.

Opportunities

Favorable Macro Factors

Recently, the Federal Reserve slightly increased the economic growth forecast for the year 2017 to 2.5%. For 2018, the apex bank predicts a growth rate of 2.5%, up from 2.1% estimated in September. By end 2018, the unemployment rate is projected to decline to 3.9% from 4.1% as of October 2017. These positive macroeconomic factors are likely to aid the U.S. auto sector at least in the near term.

Also, the positive trend in US. truck sales is likely to continue as chances of any significant rise in oil price in the near term are also slim.

Global Sales to Grow Modestly

Though presently, the automotive industry isn’t in great shape, it is not far behind the record-setting previous year. One important development is the gradual shift in source of income or cynosure. IHS Markit predicts total global light vehicle sales to reach 93.5 million units in 2017, up 1.5% from 2016. Majority of the global growth can be attributed to China. IHS Markit anticipates China to remain the world’s largest car market in the foreseeable future.

Rising Vehicles Age in the United States

The rising average age of vehicles on U.S. roads is adding to higher replacement demand for cars as well as car parts. The improved quality of new vehicles is likely to mainly be behind this rise in average age of vehicles over time. According to IHS Automotive, as of 2016, the average age of light vehicles was 11.6 years, whereas it was 9.9 years a decade ago. Moreover, by 2021, around 81 million vehicles are expected to be over 16 years old compared with 62 million vehicles today. This will benefit replacement part manufacturers and retailers, apart from new vehicle manufacturers and retailers.

Sales in China Continue to Rev Up

A number of automakers, including the likes of Ford and General Motors, have been banking on strong sales growth in China to drive earnings over the next few years. In the first 11 months of 2017, retail auto sales in China rose 1.6% to 21.4 million units. According to China Passenger Car Association Vehicle, sales in China is likely to trend up in 2018 as economic benefits propel demand from cities and provinces situated in its interiors.

For 2018, sales are projected to grow about 4%, double the growth anticipated for 2017. Like U.S. automakers, the European auto giant is also taking China very seriously and coming up with new models designed for that country.

Attractive, Tech-Savvy Vehicle Launches

In order to stay competitive and boost revenues, automakers have to constantly come up with new and attractive, technologically advanced vehicles. Most of the automakers are also revamping their popular vehicles with new technologies and visual appeal. Features such as backup cameras, automatic emergency braking and in-car connectivity are common in most vehicle segments.

In fact, automakers are also offering attractive optional to scoop up greater profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.

Bottom Line

The solid outlook for the economy is certainly a blessing for the auto sector, which is facing myriad challenges. And with China touted to retain its dominance in the near term, the race among manufacturers is likely to heat up.

At this juncture, we recommend stocks such as Allison Transmission Holdings, Inc. (ALSN), AB Volvo (VLVLY) and Wabco Holdings Inc. (WBC). While Allison Transmission and Volvo sport a Zacks Rank #1 (Strong Buy), Wabco Holdings carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Allison Transmission has a long-term growth rate of 10%. Shares of the company have gained 22.5% year to date.

Volvo has a long-term growth rate of 15%. Shares of the company have gained 59.3% year to date.

Wabco Holdings has a long-term growth rate of 15%. Its shares have rallied 32.3% year to date.

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