The auto sector’s second-quarter earnings weakness is likely to spill over to the third quarter. The fourth quarter could, however, surprise with a strong rebound as U.S. sales continue to improve and China remains a strong market for automobiles. However, the recovery in the European auto market is showing signs of wavering.

Source: www.fidelity.com

After a thriving 2013, global automobile sales are expected to rise to 85 million units in 2014 from 82.84 million in the earlier year, according to IHS Automotive, a unit of IHS Inc. IHS. Even the 100 million-unit milestone is not far and might be reached in 2018.

Last year, the automobile market recovered significantly from the impact of the global financial crisis, buoyed by economic recovery, pent-up demand in the U.S. and high growth in Asia. Japanese automaker Toyota Motor Corp. (TM - Analyst Report) retained its market leading position in terms of global sales volume and sold 9.98 million vehicles, up 2% from the 2012 level. General Motors Company (GM - Analyst Report) and Volkswagen AG (VLKAY) occupied the second and third positions, with sales volumes of 9.71 million and 9.7 million, respectively.

Toyota topped auto sales in the first half of 2014, too, having sold 5.1 million vehicles globally. The uptrend is expected to continue through 2014 for all automakers, considering the sales increase in the U.S. and China. However, the high incentives they offer and increasing recall-related costs are affecting their bottom lines.

Zacks Industry Rank – Mixed Outlook

The distinctive attributes 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 are in the Consumer Discretionary sector (the S&P has 10 sectors versus 16 for Zacks).

At the expanded classification level, the Zacks auto sector is divided into five industries: Auto-Domestic, Auto-Foreign, Auto/Truck-Original, Auto/Truck-Replacement and Engines.

The level of sensitivity and exposure to different stages of the economic cycle vary for each industry. The sector’s retail operations are part of the Zacks Retail sector in two industries – one being Automobile/Trucks and the other Auto Parts.

The current Zacks Industry Rank is #42 for Auto-Domestic , #106 for Auto-Foreign, #77 for Auto/Truck-Original, #217 for Auto/Truck-Replacement, #106 for Engines, #51 for Retail/Wholesale Auto/Truck and #106 for Retail/Wholesale-Auto Parts. As a reference point, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,’ between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.’

This implies that the general outlook for all auto-related industries is neutral to modestly positive – four of the five industries in the top 50% of all industries. We rank all 260-plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.

The industry has been a laggard thus far this year, with the weakest stock price performance of all sectors in the S&P 500. But the coming periods appear promising.

Sector Level Earnings Trend

The auto sector is expected to contribute 1.8% of total the S&P 500 earnings in 2014, more than its 1.4% market cap weight in the index at present.

Looking at the overall results of the auto sector, earnings fell 7.7% year over year in the second quarter, compared with the 22.1% year-over-year decline in the previous quarter. Total revenue increased 2.9% year over year in the quarter versus a 2.1% year-over-year gain in the first quarter. The beat ratio was 80% for earnings and 30% for revenues.

Auto sector earnings are expected to plunge 21.4% in the third quarter of 2014, placing it among the laggards when compared to the other sectors covered by Zacks. However, earnings are expected to recover in the fourth quarter with year-over-year growth of 19.3%, which would position auto among the best-performing sectors. Revenues are expected to move up 1.2% in the third quarter and 0.7% in the fourth quarter.

In 2014, earnings are expected to move down 2.4%, making it the weakest performing sector. Revenue growth is expected to be a modest 0.1% for the sector.

For more information about earnings for this sector and others, please read our 'Earnings Trends' report.

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