Typically, an earnings beat increases an investors' confidence in a company and most often translates into price appreciation for the stock. For an industry riddled with changing dynamics, an earnings beat is a welcome break from the overall uncertainty. The story is particularly true for the Auto sector.
Per the latest Earnings Trends , as of Oct 25, 164 S&P 500 companies have already announced their results. These companies have posted 7% year-over-year growth in earnings and a 4.8% rise in revenues, with a 72% and 68.35 beat ratio, respectively. As of the same date, 40% of the companies from the Auto sector reported results with 22.8% and 16.2% year-over-year decline in earnings and revenues, respectively. Here, the beat ratio is 50% for both earnings and revenues.
For the third quarter, earnings and revenue growth rates for auto companies are expected in the negative territory. Auto stocks are expected to register a respective 9.8% and 4% year-over-year decline in earnings and revenues.
This does not mean that the sector is bereft of any likely earnings beat. Let's look at the fundamentals ruling the space and influencing its performance this reporting cycle.
Auto Stocks: Uncertain Future
Of late, automakers are going through a transformation in industry dynamics and making compulsory adjustments. The growing necessity for electric vehicles and green cars has prodded automakers to invest for the future. However, the profit proposition of this new transition strategy is yet to be proved that rewarding. Despite having spent years in research and development, traditional automakers might not lose their position so early and easily.
On the other hand, perennial problems of recalls and lawsuits are still plaguing some automakers. Also, major U.S. automakers reported year-over-year decline in auto sales in the United States in July and August. However, this trend has reversed in September. Although the 2017 outlook for some makers is bullish, this does not ensure any upcoming bull-run.
Undoubtedly, it is incredibly challenging for the auto companies, braving these challenges. A right balance between inherent strength and changing realities is required to ride through the steep bumps ahead.
The Zacks Methodology
Despite the uncertain future, a few auto stocks are likely to deliver positive earnings surprise in the forthcoming results.
Figuring out such prospective stocks could be quite tough unless one applies the proper method. The Zacks methodology makes the task simple by combining a favorable Zacks Rank - Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .
Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. And research shows that for stocks with this combination of a Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.
You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
4 Auto Picks
Here are four auto stocks that have the right combination of elements to deliver an earnings beat when they release third-quarter results.
CNH Industrial N.V. ( CNHI ) has an Earnings ESP of +8.11% and a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here .
London-based CNH Industrial is engaged in designing, producing, marketing, selling, and financing agricultural and construction equipment, trucks, commercial vehicles, and buses worldwide. The company's third-quarter 2017 financial results are expected to be released on Oct 31.
Horizon Global Corporation ( HZN ) has an Earnings ESP of +5.82% and a Zacks Rank #3.
Troy, MI-based Horizon Global Corporation designs, manufactures, and distributes a range of towing, trailering, cargo management, and other related accessory products to the automotive aftermarket, retail, and original equipment channels worldwide. The company is expected to report third-quarter 2017 results on Oct 31.
Meritor, Inc. ( MTOR ) has an Earnings ESP of +4.26% and sports a Zacks Rank of 1.
Headquartered in Troy, MI, Meritor is a global automotive parts manufacturer and supplier. The company is expected to release fourth-quarter 2017 results on Nov 15.
American Axle & Manufacturing Holdings, Inc. ( AXL ) has an Earnings ESP of +3.99% and a Zacks Rank 3.
Detroit, MI-based American Axle & Manufacturing is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company is expected to release third-quarter 2017 results on Nov 3.
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