The third-quarter reporting cycle is finally here. PACCAR Inc. PCAR is set to kick off the earnings season for the Auto-Tires-Trucks sector next week.

Per the Oct 9 Earnings Preview, the auto sector’s earnings tanked 123.5% on a 49.7% revenue slump during the second quarter. However, things seem to be gradually looking up for the sector. While earnings and revenues are expected to have declined in the September-end quarter as well, these declines are likely to be less severe. In the third quarter, overall earnings and revenues for the sector are projected to fall 35.1% and 4.8%, year over year.

Dismal Q2 Performance

The coronavirus outbreak hit the auto industry hard in the latter half of the first quarter and the second quarter. The pandemic hurt the industry significantly amid factory closures, low footfall at dealerships and supply-chain distortions. Depressed demand of vehicles amid waning consumer confidence has dented the margins of most automakers across the globe. Amid the coronavirus crisis-induced lockdown, with thousands of people working from homes, consumers had put off big-ticket purchases like cars, causing the global auto sales to plummet during the April-June period.

Per the S&P Global Market Intelligence analysis, U.S. auto sales plunged 33.3% year over year in the second quarter, with the overall non-seasonally adjusted U.S. vehicle sales for the period summing up to 2.95 million units, down from the 2019 figure of 4.42 million units. Notably, vehicle sales from each of the Detroit 3 carmakers — Ford, General Motors and Fiat Chrysler — dropped year over year during the June-end quarter.

U.S. Auto Industry Gathered Momentum in Q3

The pandemic has significantly transformed the auto industry. With social distancing becoming the new normal, people are avoiding public transportation, which makes private transportation the need of the hour. Remarkably, U.S. auto sales are showing signs of recovery as demand for new vehicles has been rising following the gradual reopening of the economy. Though the third-quarter U.S. new vehicle sales dropped year on year, the same has increased sequentially, suggesting a V-shaped recovery in the industry. In fact, sales in September grew year over year, which is a good sign.

Robust consumer demand for pick-up trucks and sport-utility vehicles as well, as low interest rates fueled sales during the April-June period. This trend is likely to continue as the Fed has pledged to keep rates at lower levels until the end of 2023 that will continue to support lending and boost consumer spending. The prevalent low interest rates have encouraged buying of new cars, prompting more consumers to avail loans.

Our Choices

We have handpicked four stocks in the auto industry with the help of our VGM Score amid this encouraging scenario that have the potential to yield higher returns in the days to come. A value stock implies stocks trading lower than its fair price or intrinsic value and thus, offers a significant upside potential. For this particular strategy, stocks with a VGM Score of A or B have been selected. Additionally, the screened stocks carry a Zacks Rank of #1 (Strong Buy) or #2 (Buy).

LKQ Corporation LKQ: LKQ is one of the leading providers of replacement parts, components, and systems that are required to repair and maintain vehicles. The company’s acquisitions and divestments have aided it in streamlining its portfolio and boosting long-term prospects. LKQ’s solid financials, healthy free cash-flow generation and cost-containment efforts bode well for the company’s earnings prospects. The auto parts supplier has an impressive earnings surprise history, having topped estimates in each of the trailing four quarters, the average surprise being 77.1%. Moreover, over the past 90 days, the Zacks Consensus Estimate for LKQ’s third-quarter earnings has witnessed an upward revision of 34.2%.

LKQ currently sports a Zacks Rank #1 and has an attractive VGM score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Genuine Parts Company GPC: Genuine Parts’ strategic acquisitions to improve product offerings and expand its geographical footprint are commendable. The company’s buyouts of PartsPoint, Alliance Automotive Group and Inenco will bolster its growth. E-commerce initiatives, including buy-online, pickup-in-store, curbside pick-up and expanded ship-to-home capabilities are boosting its sales. Investment in Sparesbox, which is Australia’s leading online auto parts and accessories business, is likely to enhance the firm’s digital sales capabilities in Australasia in the upcoming period.

Genuine Parts’ Zacks Consensus Estimate for the to-be-reported quarter’s earnings has moved 42.6% north in 90 days’ time. Over the preceding four quarters, the company beat estimates on three occasions and missed in the other, the average beat being 4.8%.

The company flaunts a Zacks Rank of 1 and has a VGM score of B, at present.

Cooper Tire Rubber Company CTB: Cooper Tire continues to develop great products with superior design and functionality, which caters to market demand in all regions. Profitable name-brand tire sales, product launches, expansion within original equipment channels, and expanding its global manufacturing footprint are anticipated to drive margins over the long term. The tire manufacturer’s continued retail penetration will likely generate significant revenue opportunities in the days to come.

The Zacks Consensus Estimate for Cooper Tire’s September-end quarter earnings has been revised 51.2% upward in the past 90 days. In the past four quarters, the company has surpassed estimates on all occasions, the average surprise being 47.4%.    

The stock currently sports a Zacks Rank of 1 and has an impressive VGM score of A.

PACCAR Inc.: PACCAR is a leading manufacturer of heavy-duty trucks and has substantial manufacturing exposure to light/medium trucks. The company also provides customer support for its products by supplying after-market parts as well as finance and leasing services. The trucking giant’s leading brands, Kenworth, Peterbilt and DAF, along with its balance-sheet strength and investor-friendly moves are PACCAR’s major tailwinds.

The Zacks Consensus Estimate for PACCAR’s third-quarter earnings has witnessed an upward revision of 58.6% over the past 90 days. The consensus mark for 2020 has moved 20.7% north during the same time period. In the trailing four quarters, the company has outpaced estimates on three occasions and missed in the other, the average beat being 8.5%.

Currently, PACCAR carries a Zacks Rank of 2 and has a VGM score of B.

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PACCAR Inc. (PCAR): Free Stock Analysis Report

Cooper Tire Rubber Company (CTB): Free Stock Analysis Report

Genuine Parts Company (GPC): Free Stock Analysis Report

LKQ Corporation (LKQ): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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