Automotive stocks have been under pressure in the past because of a number of factors including oil prices, loan crisis, product recalls, etc. But for now the sector has a few things going for it, creating an opportunity for investment.
The unfavorable aspects include continued sluggish demand in the mature markets of the Americas and Europe, and regulatory measures in China, the largest automotive market. India too is following in China’s footsteps and is in the process of finalizing a plan that would limit new vehicle registration to prioritize electric vehicles. This can be a negative for automakers that haven’t embraced electric, but it’s a negative for other automakers as well because infrastructure (particularly, charging stations) is lagging vehicle production, making adoption difficult even if the cars become available. These are the main pressure son light vehicle production today.
On the positive is the continued pressure on oil prices because U.S. drilling is making up for OPEC’s decision to cut production. Low oil prices are encouraging people to go for larger cars and SUVs, which is obviously positive for the industry.
Another positive is truck production, which seems to be gathering momentum across the world and particularly in North America.
In addition, technological advancements like increased in-dash automation, infotainment, self-driving technologies, electric and hybrid cars present significant opportunity for auto parts suppliers.
Studies show that the top 50% of Zacks Ranked Industries outperforms the bottom 50% by a factor of more than 2 to 1. So the Automotive – Original Equipment segment, which is in the top 27% of Zacks-ranked industries, looks like a good place to invest in.
The segment has outperformed the S&P 500 in the past month, having appreciated 7.7% compared to the 2.1% growth for the S&P 500.
Segment revenue jumped very strongly from the 2009 recession after which it stabilized and then dipped in 2015 before moving north again. Gross profit rose consistently during the same period but was again impacted by 2015 pressures. The need to keep up with rapid technological changes that are reshaping the automotive market led the sector to raise a significant amount of debt in 2015 that was used to fund acquisitions through 2015 and 2016, and increase R&D and SG&A investments (up 18.4% last year). Buying back shares has been a consistent policy to boost the EPS.
Allison Transmission Holdings Inc. ALSN
Allison Transmission Holdings designs and manufactures fully-automatic transmissions for the commercial and defense markets. Its target applications are medium- and heavy-duty commercial vehicles, including on-highway trucks (distribution, refuse, construction, fire and emergency), buses (primarily school, transit and hybrid-transit), motorhomes, off-highway vehicles and equipment (energy, mining and construction).
On the defense side, it targets medium-and heavy-tactical U.S. defense vehicles. The 100 models designed by the company were used in more than 2,500 different vehicle configurations and were compatible with over 500 combinations of engines as of December 31, 2016.
The company beat the Zacks Consensus Estimate by 48.6% in the last quarter. The company derives most of its revenue from the on-highway segment (North America was down slightly due to weakness in some models, China was also down and was offset by stronger India). The timing of orders was positive for the defense and North America propulsion systems segments. There was significant gross margin improvement from the year-ago quarter that was helped by revenue growth, stronger pricing and manufacturing efficiencies, partially offset by higher compensation expenses.
The company has posted positive surprises in three of the last four quarters at an average four-quarter surprise of 12.9%. The estimate for the current quarter is up 11.9% and for 2017 up 19.2%. The estimate for 2018 is also up 14.8%.
Allison Transmission carries a Zacks Rank #1 (Strong Buy) You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Commercial Vehicle Group, IncCVGI
Commercial Vehicle Group, which supplies a range of cab-related products and systems makes its products for the commercial vehicle market, including the medium-and heavy-duty truck market, the medium-and heavy-construction vehicle market, and the military, bus, agriculture, mining, industrial equipment and off-road recreational markets. It operates through two segments: the Global Truck and Bus Segment (GTB Segment) and the Global Construction and Agriculture Segment (GCA Segment).
The GTB Segment manufactures and sells products, which include seats, trim, sleeper boxes, cab structures, structural components and body panels, and mirrors and wiper systems. The GCA Segment manufactures and sells things like electronic wire harness assemblies and seats, wiper systems, office seating, and aftermarket seats and components. It has manufacturing operations in the United States, Mexico, the UK, Czech Republic, Ukraine, China, India and Australia.
Commercial Vehicle’s earnings of 8 cents in the last quarter blew past the Zacks Consensus Estimate of $0.00. The company is benefiting from heavy duty truck production in North America and strengthening global construction markets, which constitute its two largest businesses. While operational improvements and the benefit of cost reduction and restructuring actions were positive for margins in the last quarter, there were challenges related to its North American wire harness operations.
The company posted triple digit earnings surprises in each of the last three quarters with the average four quarter surprise at 161.11%. The company reported results on May 4, so estimates haven’t been revised yet. The Zacks Consensus Estimate for 2017 and 2018 however are both up 45% in the last 60 days.
Commercial Vehicle carries a Zacks Rank #1 (Strong Buy). It has a Value Score of A, Momentum Score of B and VGM Score of A meaning that value investors should be interested in the stock.
Dana Inc DAN
Dana Incorporated is a global provider of technology driveline, sealing and thermal-management products. The Company operates in four segments: Light Vehicle Driveline Technologies, Commercial Vehicle Driveline Technologies, Off-Highway Driveline Technologies and Power Technologies. It has operations in North America, South America, Europe and the Asia/Pacific.
Dana beat the Zacks Consensus Estimate by 65.9% in the last quarter. Quarterly revenue grew organically but was also helped by acquisitions (it closed two acquisitions during the quarter). All segments grew revenue and EBITDA from last year. The company provided brief updates on geographies in 2017: North America to be boosted by trucks with light vehicles remaining soft; South America to be helped by Brazil (recession likely over) and Argentina; Europe to remain weak with agriculture market remaining stable; Asia/Pac driven by India (positive economic growth partly offset by weak exports impacting trucks) and China (weak due to government reforms and lower stimulus) with light vehicle production to be up.
The company reported a positive surprise in each of the last four quarters with the average surprise in the last four quarters at 36.0%. The estimate for 2017 is up 7.4% in the last 7 days and that for 2018 is up 5.4%.
Dana carries a Zacks Rank #1 (Strong Buy). The shares have a Value Score B, meaning that the stock will be specially attractive for value investors.
VOLVO AB VLVLY)
Volvo AB is a manufacturer of trucks, buses, construction equipment and marine and industrial engines. It also develops, manufactures and markets equipment for construction and related industries, including wheel and backhoe loaders, hydraulic wheeled and crawler excavators, articulated and rigid haulers, compactors, pavers, pipe layers and road machinery under the brand names of Volvo, SDLG and Terex Trucks. The Company offers repair and maintenance, lease financing, insurance and financial services.
The company reported a positive earnings surprise of 36.8% in the last quarter. The quarter’s performance was helped by a 34% increase in construction equipment volumes. Management said that the earnings improvement was attributable to all segments, and especially trucks and Volvo CE.
The Zacks Consensus Estimate for the current quarter is up 52.4% and estimates for 2017 and 2018 are also trending higher.
The shares carry a Zacks Rank #1 (Strong Buy). They also have a Value Score B, Growth Score A and VGM Score A meaning that just about anybody would find the stock a good investment.
BorgWarner offers technology solutions for combustion, hybrid and electric vehicles through its Engine and Drivetrain segments. The Engine segment's products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains.
The Drivetrain segment's products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. Customers include OEMs of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks), OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications.
BorgWarner beat the Zacks Consensus Estimate by 8.3% in the last quarter. Both segments contributed to the earnings beat. Management said on the call that light vehicle production was stronger than expected in China (very good because the company is increasing share and content per vehicle here) and was relatively strong in other geographies as well (it isn’t expected to be very strong in 2017 however). Commercial vehicle outlook remains soft although improving.
The company has a positive surprise history, beating the Zacks Consensus in each of the last four quarters at an average rate of 3.3%. The Zacks Consensus Estimates for 2017 and 2018 are up 4.7% and 2.7%, respectively since the company reported. They also have a Value Score B, Growth Score B and VGM Score B meaning that just about anybody would find the stock a good investment.
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BorgWarner Inc. (BWA): Free Stock Analysis Report
Allison Transmission Holdings, Inc. (ALSN): Free Stock Analysis Report
Commercial Vehicle Group, Inc. (CVGI): Free Stock Analysis Report
Dana Incorporated (DAN): Free Stock Analysis Report
Volvo Ab (VLVLY): Free Stock Analysis Report
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