Q1 Auto Sales Hit by Coronavirus: ETF & Stocks in Focus

Sweta Killa

Despite a strong start to the year, the U.S. auto industry took a hit in the first quarter due to COVID-19 that forced people to stay home for the most of March, denting business of one of the nation’s largest industries (read: S&P Sees Worst-Ever Q1: 5 Stocks That Gained in the ETF).

Of the six major American and Japanese automakers, Nissan Motor NSANY stood at the bottom of the table, registering a 29.6% decline. It was preceded in the table by declines of 19.2% for Honda Motors HMC, 12.5% for Ford Motor F, 10.4% for Fiat Chrysler FCAU, 8.8% for Toyota Motor TM and 7.1% for General Motors GM.

COVID-19 Impact

Most of the decline came in the month of March as the pandemic increased with the rise in number of coronavirus cases across America that has eliminated demand for big-ticket purchases like vehicles. Investors should note that March is considered to be the highest sales month of the first quarter, especially the end of the month as automakers offer additional discounts.

However, to cushion the virus blow, many automakers offered incentives not seen since the 2008 recession. Both Fiat Chrysler and General Motors offered zero-interest 84-month loans last month for borrowers with a top-tier credit history. Fiat introduced an online retail initiative called Drive Forward, which includes incentives and a purchasing program. General Motors pointed out that with its Shop, Click, Drive program, consumers can purchase vehicles via its e-commerce channel and have them delivered to their homes.

Auto sales will continue to see downward pressure at least in the near term as many automakers and suppliers have suspended production. Notably, Ford and General Motors have extended their stoppages indefinitely as the threat of COVID-19 spreading among factory employees remains high. According to IHS Markit, all the suspensions in production taken together will slash global production by more than 1.4 million vehicles this year. The research firm estimates that the shutdown will reduce production by 478,000 units in North America, and by 336,000 units in the United States (read: ETFs at Risk as US Consumer Sentiment Hits Near 3.5-Year Low).

As a result, many analysts revised their estimates downward for new-vehicle U.S. sales for 2020, which was projected at 16.5-17 million at the start of the year. RBC Capital projects auto sales to drop 20% from last year to around 13.5 million while JD Power forecast sales to be between 14 million and 16 million. Per new research from IHS Markit, U.S. auto sales are expected to fall at least 15% this year as the country implements more aggressive restrictions to prevent the spread of the coronavirus, threatening an already-stressed auto industry.

A Ray of Hope

While the current situation seems grave for the industry, lower interest rates coupled with massive incentives are expected to propel auto sales once the disease comes under control. This is especially true as the Federal Reserve lowered interest rates to near zero to support the economy that will encourage lending and boost consumer spending. As such, this will push more consumers to avail loans while buying vehicles (read: Stimulus to Prop Up Market: Beaten Down ETFs to Buy).

Additionally, the auto sector has a compelling valuation with a P/E ratio of 8.02, the second lowest of all the 16 Zacks sectors. This could create solid entry point for investors.

Below we highlight the pure play auto ETF and a few stocks that could be attractive picks for 2020:

First Trust NASDAQ Global Auto ETF CARZ

This fund offers a pure play global exposure to 33 auto stocks by tracking the NASDAQ OMX Global Auto Index. It is highly concentrated on the top three firms with double-digit exposure each while others make up for not more than 6% share. CARZ has a lower level of $12.1 million in AUM and trades in a small average daily trading volume of about 5,000 shares. The product charges 70 bps in fees per year and has a Zacks ETF Rank #3 (Hold) with High risk outlook (read: ETFs to Ride High on Tesla's Robust Q1 Delivery Numbers).

SPX Corporation SPXC

It is a diversified, global supplier of infrastructure equipment with scalable growth platforms in heating, ventilation and air conditioning (HVAC), detection and measurement, and engineered solutions. Though the stock has witnessed negative earnings estimate revision of 13 cents over the past month for this year, it has an estimated earnings growth rate of 3.99%. SPX Corporation has a Zacks Rank #2 (Buy) and a VGM Score of B.

Spartan Motors Inc. SPAR

It is a leading designer, engineer and manufacturer of custom heavy-duty chassis. Though the stock has negative earnings growth estimate of 3.2% for this year, it has seen positive earnings estimate revision of 10 over the past 30 days. Spartan Motors has a Zacks Rank # 1 (Strong Buy) and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Modine Manufacturing Company MOD

The company operates primarily in a single industry consisting of the manufacture and sale of heat transfer equipment. The stock witnessed no earnings estimate revision for the fiscal year ending March 2020 over the past 30 days and has an expected earnings growth rate of 23.3%. It has a Zacks Rank #1 and a VGM Score of A.

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