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Zacks Industry Outlook Highlights: Toyota Motor, General Motors, Volkswagen and Ford Motor

CHICAGO, Feb. 7, 2014 /PRNewswire/ -- Today, Zacks Equity Research discusses the Autos, including Toyota Motor Corp. (NYSE:TM-Free Report), General Motors Company (NYSE:GM-Free Report), Volkswagen AG (OTC:VLKAY-Free Report) and Ford Motor Co. (NYSE:F-Free Report).

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Industry: Autos

Link: http://www.zacks.com/commentary/31215/auto-industry-stock-outlook---feb-2014

The automobile market recovered significantly in 2013 from the impact of the global financial crisis, buoyed by economic recovery and pent-up demand in the U.S. and Asia.

Japanese automaker Toyota Motor Corp. (NYSE:TM-Free Report) retained its market leading position in terms of global sales volume and sold 9.98 million vehicles during the year, up 2% over 2012 level. General Motors Company (NYSE:GM-Free Report) and Volkswagen AG (OTC:VLKAY-Free Report) occupied the second and third positions, with sales volumes of 9.71 million and 9.7 million vehicles, respectively.

General Motors was the leading automaker in the U.S. in 2013 with annual sales of 2.8 million units. Ford Motor Co. (NYSE:F-Free Report) came in second with 2.5 million units, while Toyota slipped into the third position with registered sales of 2.2 million units.

Zacks Industry Rank – Neutral 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 where autos are in the Consumer Discretionary sector (the S&P has 10 sectors vs. 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 for Automobile/Trucks and the other for Auto Parts.

The current Zacks Industry Rank for Auto-Domestic is #184, Auto-Foreign is #231, Auto/Truck-Original is #54, Auto/Truck-Replacement is #23, Engines is #28, Retail/Wholesale Auto/Truck is #101 and Retail/Wholesale-Auto Parts is #224. 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 varies significantly. 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.

Sector Level Earnings Trend

The auto sector is expected to contribute 2% of total S&P 500 earnings in 2013, more than its 1.5% market cap weightage in the index at present.

Looking at the overall results of the Auto sector, earnings surged 32.3% year over year in the third quarter of 2013, an impressive performance compared with the 18.5% year-over-year rise in the previous quarter. Total revenue increased 7% year over year in the third quarter versus a 4.7% year-over-year gain in the second quarter.

Based on the latest available information, 30% of the sector participants have already reported December quarter results with a beat ratio of 66.7% for both earnings and revenue. Total earnings for the companies that have reported so far have shown an 8.9% year-over-year increase on a 3.4% rise in revenues.

Auto sector earnings are expected to be up 20.3% in the fourth quarter while revenues are forecast to improve 4.4%, placing it among the winners in a whole bunch of 16 sectors covered by Zacks.

For the first quarter of 2014, earnings are expected to inch down 1.4% and decline further by 0.9% in the second quarter. Revenues are expected to move up 3.2% in the first quarter and 3.8% in the second quarter.

In 2014, earnings are expected to surge 11%, again putting it among the best performing sectors. However, revenue growth in 2014 is expected to be a modest 2.7%.

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

OPPORTUNITIES

Market share concentration among a few companies makes the automobile sector highly competitive. The top 10 global automakers account for nearly 94% of total vehicles sold in the U.S. To remain competitive, automakers need to design technologically advanced and economic vehicles that cater to consumers in both mature and emerging markets.

To achieve this goal, Ford has undertaken the "One Manufacturing" strategy, which aims at producing multiple models in worldwide plants in order to reduce production expenditure and adapt swiftly to changing consumer preferences. The automaker aims to manufacture an average of 4.5 models at each of its plants by 2015.

Automakers are also concentrating on providing optional features (which will save gas) on small vehicles in order to attract buyers. The inclusion of these features provides scope for higher revenue generation from small cars, which have lower profit margins relative to large trucks.

In an attempt to reduce costs, automakers continue to shift production facilities from high-cost regions such as North America and the European Union to low-cost regions such as China, India and South America. According to a study by CSM Worldwide, China and South America together will contribute more than 50% of the growth in global light vehicle production between 2008 and 2015.

Apart from individual company strategies, the government plays a pivotal role in molding the future of global auto manufacturers. The energy and environmental policies of different countries will play a major role in shaping the future of the auto industry.

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