The excitement over the elections and the possibility of a vaccine coming sooner rather than later has made the earnings season something of a non-event.
But it’s probably a good idea not to forget that earnings results and estimate revisions are the best indication we have of how a company is actually responding to the circumstances.
In case of auto stocks for example, I have been pointing out the recovering demand right through the summer. In fact, concerns about public transportation systems and the desire to get out (especially after COVID restrictions) had many people opting for road trips.
Right now, while the vaccine news is encouraging, we don’t really know when they’ll be available for the general public. And given the rising infection rates, Ubers and Lyfts don’t quite feel safe. These two factors are leading to more vehicle purchases.
The only offsetting factor, if you can call it that, is the level of unemployment, which is however also ticking down. This means that auto makers may be expected to jump out of this health crisis pretty quickly.
But at the end of the day, most of us aren’t experts. We want to be able to buy the right stock so we can hang on to it for a certain number of years, watching our wealth grow in the process. We can’t afford to make too many mistakes.
So how do we know whether these indications of recovery in the broader market are actually falling through to the individual players in the industry?
One good way is to head over to the Zacks Industry Rank page, which basically lists all the industries in descending order. So if the one you’re looking for (in this case Automotive – Domestic or Automotive – Foreign) is in the top 50% of these Zacks-classified industries, our historical research says that stocks in the industry will outperform the those in the bottom 50% by a factor of 2 to 1. That basically means that they have a relatively good chance of appreciating.
Now if those stocks carry a Zacks Rank #1, it further increases the chances of upside.
You could drill down further to check the company’s recent performance and estimate revisions for a better idea of how they’re expected to do over the next few quarters.
That’s how I picked the following stocks. I’ve also added a brief description of their operating environment and prospects based on management commentary-
Ford is seeing much stronger demand in its largest market North America (especially in trucking and with dealers building inventory). Its China business also grew double-digits in the last quarter, where it is picking up SUV market share. Market share gains are seen in all the major markets of North America, Europe and China. It continues to lose share in South America. New product launches remain on track and production ramps could negatively impact profits this quarter.
It topped the Zacks Consensus Estimate for the September quarter by 195.5%.
While the company isn’t expected to achieve 2019 revenue or earnings levels this year or the next, it’s encouraging to see the significant improvement in the company’s 2020 and 2021 estimates. The expected loss in 2020 has gone from 67 cents to 22 cents in the last 30 days while the expected profit for 2021 has gone from 66 cents to 82 cents.
General Motors Company (NYSE:GM) GM
Like Ford, GM is also seeing a faster recovery in the U.S. and China, with particular strength in full-size pickups and SUVs. The company is maintaining its leading U.S. market share in pickups and SUVs.
It will also be doing more manufacturing in China.
The other major theme for GM is its transition to an all-electric product line. So capex investments may be expected to remain above the previously-guided $7 billion in each of the next 2-3 years. Related launch costs may also be expected to increase.
A greater focus on building a product line that meets customer demand while helping the company embrace the new EV and AV trends in automotive is the main focus of management. If it has to swallow some commodity cost increases or other hiccups along the way, then so be it.
The recovering demand ensured a September-quarter beat of the Zacks Consensus Estimate by 92.5%.
It’s also driving estimate revisions for fiscal year 2020 and 2021. Accordingly, the Zacks Consensus Estimate for 2020 is up $1.96 (78.1%) in the last 30 days. The 2022 estimate is up $1.09 (25.0%).
Harley Davidson, Inc. HOG
Harley Davidson is primarily benefiting from its restructuring activities, as sales remain significantly below year-ago levels, partly because new product launches will now be in the first quarter instead of in August (as has happened in the past).
There again, it is not pursuing growth in all segments but maintaining its premium position. Its restructuring actions included the cutting down of dealer inventories, which drove up prices and demand for used motorcycles and helped dealer profits. COVID restrictions further reduced inventories.
The company topped September-quarter estimates by 254.6%.
Similar to Ford, Harley Davidson is seeing significant revision to estimates. The Zacks Consensus Estimate for 2020 is up 56 cents (329.4%) in the last 30 days. For 2021 it’s up 36 cents (14.7%).
Honda Motor Co., Ltd. HMC
While down from last year, overall demand has picked up since the pandemic, particularly in Asia. Uncertainties in the U.S. auto business remain, but Japan is picking up and China might also look good if new products are well-received. The motorcycle business should hold steady as strength across India (the largest market), Brazil and the U.S. offset softness in the second-largest market Indonesia (because of tighter loan screening).
September-quarter results beat the Zacks Consensus Estimate by 125.9%.
Stronger demand and cost cutting measures are driving estimate revisions for fiscal year 2021 ending in March. As a result, the Zacks Consensus Estimate is up 51 cents (46.4%). The 2022 estimate is up 10 cents (3.4%).
Conclusion
While I’ve picked only a handful for discussion, it’s worth noting that the whole sector is coming around. So other auto makers are also beginning to look attractive as are the other players in the supply chain. With most players seeing a stronger 2021 and mega trends like EV and AV also kicking in, this is a good time to get into auto stocks.
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