Car stocks have had it tough in 2019, dealing with falling auto sales and labor strife. The General Motors strike, however, could give the sector a pass on weak third-quarter numbers, setting up an interesting trade for investors into year-end.
“Many [suppliers] are likely to cut 2019 guidance, [which] investors might look through,” Credit Suisse analyst Dan Levy wrote in a Friday research report. He sees negative earnings-estimate revisions coming when third-quarter numbers are reported. Still, the industry may get a bye because of the General Motors (GM) strike. He isn’t the only on one Wall Street who feels the that way.
“Bottom-line, we wouldn’t be surprised if the group rallies on a GM/UAW resolution given some clarity,” RBC analyst Joseph Spak said in a Sunday research report.
That is a bit of good news for the struggling sector. Auto sales are falling globally. In China, the largest new-car market in the world, for instance, car sales are down about 12% year over year. U.S. sales are down, too, albeit by a much smaller percentage. Still, U.S. car sales have plateaued around 17 million units for the past few years. Investors prefer when sales are rising.
Industry sales weakness is reflected in the stock prices. The Russell 3000 Auto & Auto Parts Index is up just 4.6% year to date, trailing the 15.2% gain of the Dow Jones Industrial Average (.DJI). Over the past three years the auto index has returned just 2.2% a year on average, worse than the 16.7% average annual gain of the Dow over the same span. What’s more, car stocks trade for 10 times estimated next year’s earnings. Dow stocks, by comparison, trade for about 15 times estimated earnings and consumer discretionary components of the S&P 500 (.SPX) trade for 20 times estimated earnings.
Both Spak and Levy, however, aren’t sanguine about the sector. Both think 2020 is shaping up to be a difficult year.
“We’d remain cautious on suppliers heading into 2020,” Spak wrote. “We are, on average, about 8% below consensus estimates.”
“The next data point is likely to be around the outlook for 2020,” Levy said. “We expect negative [consensus estimate] revisions.”
But 2020 outlooks don’t usually come until January for the sector, creating an opportunity, according to Morgan Stanley.
Analyst Adam Jonas thinks low interest rates—don’t forget, cars are usually bought on credit—Chinese economic improvement, and a GM strike resolution are bullish for auto stocks heading into year-end. He wrote in a Monday research report that it is “time to be tactically positive” on the sector. Two stocks Jonas likes are GM and Ford Motor (F). He rates both the equivalent of Buy.
Of course, there is a scenario in which all three analysts are correct—with stocks bouncing even if 2020 guidance proves disappointing. Car stocks have underperformed since GM workers went on strike. GM shares are down about 9% since the strike began and the Russell Auto & Auto Parts Index is off about 5%. The Dow, by comparison, is down about 1% in that time.
Auto investors have some time to decide what to do heading into car-company earnings reports. Tesla (TSLA) and Ford kick off auto reporting season on Oct. 23. GM reports third-quarter numbers on Oct. 29. Large parts suppliers such as Lear (LEA), Aptiv (APTV) and BorgWarner (BWA) report numbers on Oct. 25, 30 and 31, respectively. All three of those parts companies cut guidance when reporting second-quarter numbers in July.
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