The Auto sector has been performing well of late. The sector has been gaining on low fuel costs, economic stability and support from President Trump. 2016 marked the 17th consecutive year of higher auto sales in the U.S. and most analysts expect sales in 2017 to remain strong.
What’s Driving the Sector?
Strong macroeconomic factors such as rising employment and personal income as well as low fuel prices will continue to drive sales. Moreover, sales of high margin product segments such as pickup trucks, SUVs and crossover vehicles are expected to remain strong this year. Further, the high average age of cars on U.S. roads should continue to boost replacement demand for cars as well as car parts.
Trump’s recent decision to reopen the review of the efficiency standards set forth by the Obama administration that increase costs for automakers is expected to be beneficial. Additionally, Trump reiterated his assurance to renegotiate trade deals to promote domestic production.
Moreover, companies in this sector are also becoming attractive picks for tech giants who are looking to gain momentum in the autonomous driving space. A number of tech companies are looking to acquire or build partnerships with auto companies to jointly develop the technology.
An Overview of the Industry
The Zacks classified Auto, Tires and Trucks sector holds an Industry Rank #1. Moreover, most industries within the sector are in the top 40%, compared to over 250 industries.
Looking at the industry’s EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple, which is a good multiple for valuing automakers because of their capital-intensive business, the sector appears to be undervalued compared to the market at large.
The industry currently has a trailing 12-month EV/EBITDA ratio of 8.19. This level compares favorably with what the industry witnessed in the last five years. The ratio is lower than the midpoint of 9.50 and is significantly below its high of 13.42.
Moreover, it compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is 10.83 and the median level is 9.13.
This also increases the potential for the sector to perform well in the upcoming quarters.
Stocks to Dump
While the sector is expected to perform well at large, not at all stocks within its purview will perform well. It is wiser to get rid of stocks that could potentially decrease portfolio returns.
These stocks have seen negative estimate revisions for the current quarter as well as year over in the last four weeks. Moreover, all of these stocks either carry a Zacks Rank #4 (Sell) or 5 (Strong Sell). Over the last 30 days, these stocks have already begun to lose value and are expected to continue to do so. These facts hint at the negative sentiments prevailing among investors over these stocks.
Genuine Parts Company GPC is a distributor of automotive replacement parts in the U.S., Canada and Mexico. The stock carries a Zacks Rank #4. The current quarter and current year estimates for the company have declined 2.7% and 0.6%, respectively, over the past 60 days. Moreover, the stock price has seen a 0.3% decline over the past month.
LKQ Corporation LKQ is the largest nationwide provider of recycled OEM automotive replacement parts and related services in the U.S. The stock carries a Zacks Rank #4. The current quarter and full-year estimates for the company have declined 6.2% and 1.7%, respectively, over the past month. Moreover, the stock price has seen a 0.4% decline during this period.
Douglas Dynamics, Inc. PLOW designs, manufactures and sells snow and ice control equipment for light trucks. The stock carries a Zacks Rank #4. The current quarter and full-year estimates for the company have declined 8.9% and 311.1%, respectively, over the past month. Moreover, the stock price has seen a 5% decline during this period.
Ford Motor Company F produces cars and trucks. The stock carries a Zacks Rank #5. The current quarter and full-year estimates for the company have declined 7% and 22.4%, respectively, over the past month. Moreover, the stock price has seen a 3.5% decline during this period.
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