3 Auto Parts Stocks Poised to Beat Earnings - Earnings ESP

3 Auto Parts Stocks Poised to Beat Earnings

 

The disappointing financial results of automobile giants like Ford Motor Co. F and General Motors Co. GM were expected, based on the weak U.S. auto sales in the first two months of 2014, recall-related trouble faced by General Motors and the lackluster guidance provided by Ford. Auto companies that reported earnings up to Apr 25 have an average beat ratio of 50% and median surprise of -0.3%. Moreover, their average earnings are down 30.9% from the same period last year. 

 

While these figures may not inspire confidence, they do not imply that all auto companies will disappoint. In March, U.S. auto sales recovered enough to offset the decline in the first two months, leading to a 1% year-over-year increase during the first quarter. Moreover, auto sales in Asia remained strong during the quarter. 

 

While safety recalls and harsh weather conditions in the U.S. negatively affected auto manufacturers, auto parts manufacturers performed well during the period. The severe winter boosted demand for replacement of auto parts. Auto parts manufacturers also benefited from the record high global automobile production in the first quarter. The all-time high average age of vehicles on U.S. roads is also resulting in demand for parts replacement. 

 

Thus, it may be a good idea to look at some companies in the auto sector that have the potential to beat earnings in their upcoming releases. 

 

The Way to Pick Right Stocks

 

The huge number of industry participants makes it difficult to shortlist stocks that have the potential to beat earnings. This is where the Zacks proprietary methodology comes in handy. It helps one narrow down the list by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.

 

Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. It helps in picking out stocks that have high chances of surprising in their next earnings announcement. Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. 

 

Here we have selected 3 auto stocks that have the right combination of elements to report earnings beat this earnings season.

 

Advance Auto Parts Inc. AAP holds a Zacks Rank #3 and has an Earnings ESP of +5.12%. The Zacks Consensus Estimate for this auto parts company's first-quarter earnings is $2.15 per share, which reflects an expected year-over-year gain of 30.3%. 

 

Advance Auto Parts has a history of outperforming earnings estimates. The company delivered positive earnings surprises in each of the trailing 4 quarters with an average beat of 8.66%.

 

Advance Auto Parts operates in the U.S. automotive aftermarket industry and is primarily engaged in selling replacement parts (excluding tires), accessories, maintenance items, batteries and maintenance items for cars, vans, sport utility vehicles and light trucks. The company is expected to report its first quarter results on May 15.

 

BorgWarner Inc. BWA carries a Zacks Rank #3 with an Earnings ESP of +2.5%. The Zacks Consensus Estimate for the company's first-quarter 2014 earnings is at 80 cents per share, an estimated increase of 23.59% over the first quarter of 2013. 

 

BorgWarner delivered positive earnings surprises in the trailing 4 quarters with an average beat of 7.36%. The earnings beat streak is expected to continue in first-quarter 2014 as well, driven by the company's efforts to improve operational efficiency and manage costs along with the rising demand for technology that improves fuel economy, emission standards and performance of automobiles.

 

Michigan-based BorgWarner is a leading manufacturer of powertrain products for the world's major automakers. Its largest customers include Volkswagen AG (VLKAY) and Ford. The company is expected to report its first quarter results on May 1.

 

Fox Factory Holding Corp FOXF carries a Zacks Rank #2 and has an Earnings ESP of +12.5%. The Zacks Consensus Estimate for the company's first-quarter earnings is pegged at 8 cents per share. 

 

Fox Factory generated positive earnings surprises in the last 3 quarters with an average beat of 19.02%. The company is expected to beat earnings when it releases its first-quarter results on May 7.

 

Headquartered in Scotts Valley, CA, Fox Factory designs and manufactures suspension products for mountain bikes, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles, trucks, all-terrain vehicles, snowmobiles, specialty vehicles and applications, and motorcycles. 

 

Bottom Line

 

Investing in companies with an earnings beat potential is a good investment strategy for the short term. An earnings beat will increase investors' confidence, which will lead to immediate price appreciation.