Auto Industry Stock Outlook - April 2018

U.S. vehicle sales declined in 2017 for the first time since the financial crisis. The first two months of 2018 were also unimpressive for the auto sector, but the growth trend came back in March, with the major automakers registering strong sales. A robust job market and favorable tax laws have worked in favor of sales. Moreover, rising demand for profitable crossovers, sports utility vehicles (SUVs) and pickups are also aiding the auto industry.

However, the auto space has also grappled with several challenges. Trade tensions between China and the United States, the compulsion to embrace various changes, and safety recall issues are some of the challenges faced by the automakers.

Also, the industry is going through a transition. The necessity of manufacturing electric vehicles in a profitable way is fast becoming a big challenge for automakers. In recent times, General Motors Company (GM - Free Report) and Ford Motor Company (F - Free Report) have added some new EVs to their individual lineup. German auto major, Volkswagen AG (VLKAY - Free Report) is also committed to introduce new energy vehicles. Other automakers are also following suit.

These challenges are showing up in the sector’s stock market performance. Stocks in the Zacks Auto sector are down -2.6% in the year-to-date period, lagging the S&P 500 index’s +0.4% gain. On a trailing 12-month basis, the sector’s performance is roughly in-line with the S&P 500 index.

Zacks Industry Rank – Positive Outlook

The typical characteristics 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 is part of the Consumer Discretionary sector. The S&P has 10 sectors compared with the 16 sectors for Zacks.

At the expanded classification level, the Zacks Auto sector is divided into six industries: Auto-Domestic, Auto-Foreign, Auto-Original Equipment, Auto-Replacement Parts, Auto-Internal Combustion Engines and Rubber-Tires. The level of sensitivity and exposure to the different stages of the economic cycle vary for each industry.

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