Lukewarm Auto Stock Earnings Put Car ETF in Focus

The U.S. auto industry has been seeing robust sales over the past few months. U.S. automobile sales are expected to reach al least 16.4 million in 2014, the best since 2006, when the industry sold 16.5 million vehicles, according to IHS Automotive, a unit of IHS Inc. (IHS)

However, concerns over several key foreign markets like Europe and record high safety recalls, have spread dark clouds over the auto industry. This has been reflected in the sector’s third-quarter 2014 earnings (read: Robust August US Auto Sales, But What's Ahead for Car ETF?).

The sector has yet again failed to impress investors on the earnings front. This is especially true as earnings of the 80% of the auto companies that have reported so far (accounting for 83.1% of the sector’s total market capitalization) are down 25.6% from the same period last year. In fact, this is much worse than the prior-quarter earnings fall of 10%.

Revenues have inched up by just 0.8% year over year, with 50% beating expectations.

Most of the big auto companies including Ford Motor Co. (F), General Motors (GM) and Honda Motor (HMC) are trading down following their earnings release.

Below we have highlighted in detail the earnings of some of the major auto companies that have reported recently.

General Motors Earnings

The largest U.S. automaker recorded adjusted earnings of $1.7 billion or 97 cents per share in the third quarter of 2014, beating the Zacks Consensus Estimate by 2 cents.
However, revenues in the quarter grew 0.8% year over year to $39.3 billion, missing the Zacks Consensus Estimate of $39.8 billion.

Strong sales in North America and growing margins in North America and China led the company to beat the earnings estimates. However, General Motors still faces weak sales in Russia and South America and a record number of industry recalls (read: Materials Sector Leading the Pack in Q3 Earnings Season: 3 ETFs in Focus).

Ford Earnings

This second-largest carmaker by sales reported a year-over-year drop in both earnings and revenues, though the company managed to beat our estimates on both counts. Decline in sales volumes, falling operating margins, higher warranty costs and adverse balance sheet exchange effects were some of the factors for the drop in earnings.

Earnings per share came in at 24 cents, down from 45 cents in the year-ago quarter, but ahead of the Zacks Consensus Estimate by 26%. Revenues in the quarter fell 2.5% year over year to $34.9 billion but managed to beat the Zacks Consensus Estimate of $33.34 billion.

Ford lowered the pre-tax profit guidance, excluding special items, for 2014 to $6 billion from the earlier range of $7 billion to $8 billion. However, the automaker is focused on its 23 global new product launches and expects more profitability in 2015. Ford expects pre-tax profit, excluding special items, in a range of $8.5 billion to $9.5 billion in 2015.

Honda Earnings

Honda missed our estimates on both earnings and revenues in its second quarter of the 2015 fiscal year. Nonetheless, the company posted a 17.9% rise in earnings and 4.3% year-over-year growth in sales led by higher revenues from the automobile and motorcycle businesses as well as favorable foreign currency translation.

For fiscal 2015, Honda expects revenues to increase 7.7% to ¥12.8 trillion. However, net income is projected to decrease 1.6% to ¥565 billion or ¥313.49 per share.

Given the mixed earnings reports from these major auto makers, these stocks could face more volatile trading in the coming days.

As a result, the auto ETF – NASDAQ Global Auto Index Fund (CARZ) – which has a sizable exposure to the above mentioned stocks, could see some rough trading in the days ahead too (read: 3 Excellent ETFs for a Low Cost Diversified Portfolio).

CARZ in Focus

The ETF tracks the Nasdaq OMX Global Auto Index, giving investors exposure to automobile manufacturers across the globe. The product holds 36 stocks in the basket with Toyota as the top holding. General Motors, Honda and Ford also score among the top holdings with a combined allocation of 23%.

The ETF has a definite tilt toward large cap stocks as these account for 88% of assets. In terms of country exposure, Japan takes the top spot at 37.1% while the U.S. takes the second spot having 23.3% allocation, followed by Germany with 20% exposure (see all Consumer Discretionary ETFs here).

The ETF has amassed $46.6 million in its asset base and sees light trading volume. The product seems to be slightly expensive with 70 bps in annual fees and has a dividend yield of 1.38%. The fund has lost 8.3% in the year-to-date frame and currently has a Zacks ETF Rank #3 or Hold rating.

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