Auto Sales Drive On The Back Of China, High-Tech Launches On

It was an exceptional 2016 for the auto sector. Sales of new vehicles reached an all-time high in the United States. Europe and China too came up with impressive sales figures. This also marked a wonderful recovery from the depths of the recession.

However, the joy ride did not continue in 2017. Reports of glut in nearly-new used vehicles started pouring in. Auto giant General Motors Company (NYSE:GM) (GM) lowered the outlook for new vehicles sales in the United States in 2017. Market reality has prompted a number of automakers to take a disciplined stance. Some of the companies are mulling over cutting production fleet.

However, there are still a few reasons to be optimistic about the broader auto industry both in the short and long run. Below, we discuss a few key factors that should continue to drive the sector’s performance in the near to medium term.

Opportunities

Global Sales to Grow Modestly

According to IHS Markit forecast, total global light vehicle sales will reach 93.5 million units in 2017, up 1.5% from 2016. Majority of the global growth can be attributed to China. Chinese-targeted auto excise duty incentives are expected to continue through 2017.

IHS Markit anticipates China to remain the world’s largest car market for the foreseeable future. It has uplifted its 2017 light vehicles sales in China forecast to 28.5 million units (up 1.9%).

Per the IHS Markit report, South Asian demand is likely to further recover in 2017. Light vehicle sales in the region are expected to grow 5.9% in 2017.

Meanwhile, Association of Southeast Asian Nations (“ASEAN”) car markets are anticipated to grow 4.6%, as recoveries continue in key markets.

Rising Vehicles Age in the United States

Further, the high average age of cars on U.S. roads should continue to boost replacement demand for cars as well as car parts. According to IHS Automotive, by 2021, around 81 million vehicles are expected to be over 16 years old compared with 62 million vehicles today. This will benefit replacement part manufacturers and retailers, apart from new vehicle manufacturers and retailers.

Sales in China Rev Up

A number of automakers, including the likes of Ford Motor Co. (F) and General Motors Company (GM), have been banking on strong sales growth in China to drive earnings over the next few years. Auto sales in the world’s largest automobile market increased 14.5% year over year to a record 28,119,000 units in 2016. Sales of passenger cars increased 14.9% to almost 24.38 million units, hitting a new high. Moreover, sales of commercial vehicles improved 5.8% year over year.

In the first seven months of 2017, both passenger cars and commercial vehicles registered robust sales in China. Sales of passenger cars increased 2% year over year to almost 12.93 million units in the first seven months of 2017, while sales of commercial vehicles rose 17.5% to 2.39 million units. Consequently, total automobile sales increased 4.1% year over year to over 15.33 million units.

Sustained Recovery in European Union

New passenger car registrations in the European Union increased 4.7% to more than 8 million units in the first half of 2017, per the European Automobile Manufacturer’s Association. The rise can be attributed to higher demand in Italy (+8.9%), Spain (+7.1%), Germany (+3.1%) and France (+3%), partly offset by a fall in demand in the United Kingdom (-1.3%). Rising consumer confidence, solid incentives, strong replacement demand and product launches are driving sales.

Attractive, Tech-Savvy Vehicle Launches

Rising sales and intense competition are encouraging automakers to come up with new and attractive, technologically advanced vehicles to gain market share. Most automakers are also revamping their popular vehicles by adding new technologies and enhancing their visual appeal to revive sales. Features such as backup cameras, automatic emergency braking and in-car connectivity are common in most vehicle segments.

In fact, automakers are offering attractive optional features in vehicles to scoop up more profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.

Bottom Line

The auto industry is benefiting from a number of factors. According to IHS Automotive, total global light vehicle sales will reach 93.5 million units in 2017, increasing 1.5% from 2016. Moreover, IHS Markit anticipates China to remain the world’s largest car market for the foreseeable future. It has uplifted its 2017 light vehicles sales in China forecast to 28.5 million units (up 1.9%).

A few automobile stocks worth considering are Continental AG (DE:CONG) (CTTAY), PACCAR Inc (NASDAQ:PCAR) (PCAR) and Fox Continental Holding Corp. (FOXF), each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Continental has a long-term growth rate of 7.9%.

PACCAR has a long-term growth rate of 10%.

Fox Factory has a long-term growth rate of 14%.

Check out our latest Auto Industry Outlook here for more on the current state of affairs in this market from an earnings perspective, and how the trend is looking for this important sector of the economy now.