Auto Stocks Have Yellow Caution Flag after Hurricane Harvey

Crista Huff

The San Antonio Express News reported that approximately 300,000 insured autos will need to be replaced in the wake of Hurricane Harvey. While doing research for Cabot Undervalued Stocks Advisor, I looked at auto stocks. So let’s examine the earnings forecasts for major auto companies to see if any auto stocks demand further attention.

Few Auto Companies Growing

Ford Motor (F – yield 5.3%) EPS are expected to fall 1.1% in 2017 and fall another 11.5% in 2018 (December year-end).

General Motors (GM – yield 4.1%) EPS are expected to be flat EPS in 2017 (December year-end), then drop 3.3% in 2018.

Honda Motor ADS (HMC – yield 3.0%) EPS are expected to fall 3.8% in fiscal 2018 (March year-end), then remain flat in 2019—not growing, but also not falling. There are only two analysts contributing to the consensus earnings estimate, so the actual results could differ to a large degree from the estimates, causing share price volatility.

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Nissan Motor Ltd. ADR (NSANY) EPS are expected to fall 12.1% in fiscal 2018 (March year-end), then rise 3.0% in 2019. There are only two analysts contributing to the consensus earnings estimate, so the actual results could differ to a large degree from the estimates, causing share price volatility.

Tesla (TSLA) is expected to take a very large loss of ($6.30) per share in 2017, followed by a loss of ($0.98) per share in 2018 (December year-end). Wall Street’s earnings estimates for TSLA consistently decline as the months pass, so the actual year-end results will most likely be even worse.

Toyota (TM – yield 3.3%) EPS are expected to fall 4.6% in 2017, then rise 3.7% in 2018.

Volkswagen AG ADR (VLKAY) EPS are expected to rise 62.8 in fiscal 2017 (December year-end), then fall 5.2% in 2018. There is only one analyst contributing to the consensus earnings estimate, so the actual results will likely differ to a large degree from the estimate, causing share price volatility.

Well, that was dismal. The first thing you noticed is that only one of these companies—Volkswagen—is expected to see its profits grow during its current fiscal year. Only two of these companies—Honda and Nissan—are expected to see profits grow next year, but that’s just a paltry 3%-4% growth. So right away, we know that none of the major auto companies can be viewed as growth stocks. A true growth stock will have double-digit annual earnings growth.

We can estimate that the aforementioned 300,000 insured cars that were harmed by Hurricane Harvey will necessarily be replaced in the current fiscal year, and therefore won’t affect next year’s profit outlook. If GM and Ford were to sell an extra 100,000 cars each in the coming months, that could possibly move their 2017 earnings expectations toward one of a small profit increase.

GM sold ten million autos in 2016, so that would be just a 1% increase in its 2017 auto sales, translating to EPS rising 1% this year. Not a terribly exciting outlook, unfortunately.

Ford sold 2,614,697 autos in 2016. If Ford were to sell another 100,000 cars this year, that would be an approximate 3.8% boost to revenue and EPS. If we increase the current Wall Street consensus earnings estimate by 3.8%, that gives Ford approximately $1.80 in 2017 EPS, which is just a 2.6% increase over 2016 results. Again, this number is not exciting, and will not attract growth investors to this auto stock.

There are lots of great growth stocks that stand to benefit from post-hurricane rebuilding, but auto stocks are not among them. Still, there could be some short-term capital gain opportunities in auto stocks for investors who want to ride the tail of bullish market sentiment.

Any Auto Stocks Worth Buying?

Ford (F) has been trading sideways since April, with upside price resistance at 11.7. If it breaks past 11.7, it could rise to its previous high at 12.6, giving new investors a potential 11% capital gain.

General Motors (GM) traded as high as 37.5 in the first quarter of this year, had a price correction, and just this week retraced that recent high. If the stock breaks past 38, that’s extremely bullish for immediate capital gain potential.

Honda (HMC) has been trading sideways since April. The price chart does not indicate a readiness to rise any time soon.

Nissan (NSANY) has significant upside price resistance at 21.5, giving new investors a maximum capital gain potential of about 7%.

Tesla (TSLA) has about 8%-9% upside as it retraces its June high, when it peaked above 380.

Toyota (TM) has a bullish price chart. The stock could rise to 123 in the coming months, giving new investors a potential 8% capital gain.

Volkswagen (VLKAY) is trading in a distinct range, and could rise to about 33.6 in the near future, giving new investors a potential 6% capital gain.

Whether I’m buying stock for a short-term trade or a longer-term hold, I prefer to focus on stocks that are about to break out of trading ranges and reach new highs. That’s because when stocks reach new highs, every single person who owns the stock is happy! Nobody has lost money, and nobody is motivated to sell the stock and drive the share price down. Therefore, when stocks begin reaching new highs, we can potentially earn outsized capital gains in the short term. In that light, the auto stock that I would buy today is General Motors (GM).

For additional details on stocks I recommend to my subscribers, check out the advisory I write, Cabot Undervalued Stocks Advisor.

For more details, click here.

Crista Huff

Buy Low, Sell High

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor. Her goal is to assist you in outperforming the major U.S. stock market indexes while minimizing risk, by screening many hundreds of stocks for growth, value and bullish technical charts.

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