Auto Industry Stock Outlook - Sept. 2015

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Impact of the Volkswagen Scandal

The recent Volkswagen AG ( VLKAY ) scandal is expected to have a significant impact on the auto sector in the near to mid term. The German automaker has been found cheating on U.S. emission tests using software that activates emission control systems in its diesel vehicles during tests. These controls are, however, automatically turned off during normal driving. Many other countries have also started investigating whether Volkswagen uses similar tactics to deceive their respective emission tests.

Apart from the massive recall-related expenses to be incurred, the scandal is also a black eye for the Volkswagen brand that will have a bearing on its sales efforts for a long time. A part of the decline will result from the automaker's decision to halt the sales of its diesel vehicles in some markets. But the sales challenge is unlikely to stay restricted to the company's diesel vehicles only -- it will have a bearing non-diesel vehicle sales all over the world.

This will position Toyota Motor Corp. ( TM ) as the leading contender for the position of the highest selling automaker globally in 2015. Although Toyota had held this position over the last three years, it had lost out to Volkswagen in the first half of 2015 and the race for the full year was expected to be a close one. Now the path seems clear for Toyota to take the lead, while General Motors Company ( gM ) will likely hold the second position if Volkswagen sales are hit hard.

Another fallout of the Volkswagen scandal will be increased regulatory scrutiny for all automakers. Already, other German automakers are beginning to feel the heat. Both BMW AG ( BAMXF ) and Daimler AG ( DDAIF ) have been forced to issue public statements clarifying that they do not manipulate emission tests following reports of higher-than-permitted emissions from their vehicles.

Meanwhile, the auto sector is facing other major concerns such as falling sales in the largest auto market, China, and increasing safety recalls.

However, there are several positive developments to offset these headwinds. Strong sales in the U.S. and Europe are pulling up global sales volumes. The low oil and gas prices are also benefiting the industry by boosting sales, particularly of larger vehicles that carry a wider profit margin.

Zacks Industry Rank - Positive to Neutral Outlook

The distinctive attributes of the auto industry prompted us to have a dedicated sector for the industry in our database. The automobile sector is one of the 16 Zacks sectors, unlike the S&P classification, wherein autos are in the Consumer Discretionary sector (the S&P has 10 sectors versus 16 for Zacks).

At the expanded classification level, the Zacks auto sector is divided into five industries: Auto-Domestic, Auto-Foreign, Auto/Truck-Original, Auto/Truck-Replacement and Engines.

The level of sensitivity and exposure to the different stages of the economic cycle vary for each industry. The sector's retail operations are part of the Zacks Retail sector in two industries: Automobile/Trucks and Other Auto Parts.

The current Zacks Industry Rank is #102 for Auto-Domestic, #154 for Auto-Foreign, #163 for Auto/Truck-Original, #49 for Auto/Truck-Replacement, #220 for Engines, #83 for Retail/Wholesale Auto/Truck and #9 for Retail/Wholesale-Auto Parts. As a reference point, the outlook for industries with a Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'

This implies that the general outlook for auto-related industries range from positive to neutral, with only the engine industry having a negative outlook at present. We rank all 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.

Sector Level Earnings Trend

The auto sector is expected to contribute 2.3% to the total S&P 500 earnings in 2015, more than its 1.3% market cap weight in the index at present.

Looking at the overall results of the auto sector, earnings surged 25.3% year over year in the second quarter of 2015 compared with 26.4% in the first quarter. Total revenue decreased 3% year over year in the second quarter against a 4.5% year-over-year fall in the prior quarter.

Auto sector earnings are expected to increase 21.2% in the third quarter of 2015, placing it at the top spot among the winners in terms of sectors covered by Zacks. However, earnings are expected to inch down 0.1% in the fourth quarter of 2015. Revenues are expected to move down 2.4% in the third quarter and 2.6% in the fourth quarter.

For more information on earnings for this sector and others, please read our latest ' Earnings Trends ' report.

Bottom Line

The auto sector is currently facing several opportunities as well as challenges. Nevertheless, the outlook for global vehicle sales for 2015 remains strong with the projection of a 2.4% rise to 88.6 million vehicles by IHS Automotive. Even the 100 million-unit milestone is not too far, and can be reached in 2018.

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VOLKSWAGEN-ADR (VLKAY): Free Stock Analysis Report

TOYOTA MOTOR CP (TM): Free Stock Analysis Report

GENERAL MOTORS (GM): Free Stock Analysis Report

DAIMLER AG (DDAIF): Free Stock Analysis Report

BMW AG (BAMXF): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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