3 Auto Stocks to Race Ahead This Earnings Season - Earnings ESP

After a weak beginning to the year due to unfavorable weather conditions, U.S. auto sales have shown improvement over the past few months. Consequently, U.S. light-vehicle sales improved 4% year over year to 8.17 million units in the first half of 2014.

In fact, for the first time since Jul 2006, sales on a seasonally adjusted annualized rate (SAAR) basis reached the 17 million mark in Jun 2014. Moreover, SAAR has remained above 16 million units in the last 4 months.

The strong sales volumes raise expectations of robust revenue figures for the major automakers. However, these automakers are offering significant incentives to boost sales, which may hurt their margins. Incentives in the form of discounts led to a 2.2% sequential decline in the average transaction price for light vehicles to $30,575 in June, per TrueCar Inc.

On the other hand, rising auto sales volumes increase the revenues of car parts manufacturers and retailers. The high average age of vehicles on U.S. roads is also resulting in demand for parts replacement. Thus, overall, the automobile sector's prospects seem bright this year. In fact, for the first time since the recession in 2008, U.S. auto sales are expected to surpass 16 million units in 2014.

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

The large 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 of help. It aids in narrowing 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 shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. It helps in selecting stocks that have high chances of posting a positive earnings surprise 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 stocks from the automobile sector that have the right combination of elements to report an earnings beat this earnings season.

has a Zacks Rank #3 and an Earnings ESP of +9.68%. The Zacks Consensus Estimate for the company's second-quarter earnings is 31 cents per share, which reflects an expected year-over-year gain of 13.89%.

Allison Transmission has a history of outperforming earnings estimates. The company delivered positive earnings surprises in the trailing four quarters with an average beat of an astounding 90.55%.

Indiana-based Allison Transmission is among the major manufacturers of commercial-duty automatic transmissions and hybrid propulsion systems globally. The company also supplies various auto parts and services customer through 1,400 independent distributor and dealer locations across the world. The company is expected to report second-quarter results on Jul 24, 2014.

has Earnings ESP of +5.77% and a Zacks Rank #2. The Zacks Consensus Estimate for this auto parts company's second-quarter 2014 earnings is at 52 cents per share.

Ohio-based Dana Holdings supplies high technology driveline, including axles, driveshafts and transmissions, as well as sealing and thermal-management products to the light, medium and heavy vehicle and off-highway markets worldwide. The company will post second-quarter earnings on Jul 24, 2014.

has a Zacks Rank #1 and an Earnings ESP of +2.08%. The Zacks Consensus Estimate for the company's second-quarter 2014 earnings is 48 cents per share, an estimated increase of 32.14% over the second quarter of 2013.

Gentex delivered positive earnings surprises in the trailing four quarters with an average beat of 10.36%. The earnings beat streak is expected to continue in second-quarter 2014 as well.

Gentex is an auto parts company that provides auto-dimming rearview mirrors with advanced electronic features, including CMOS imagers/cameras to the automotive industry, commercial fire protection products to the U.S. market, as well as dimmable aircraft windows to the aerospace industry. The company will report second-quarter 2014 earnings on Jul 24, 2014.

Above-expectation earnings increase investors' confidence in a stock, which leads to immediate price appreciation. Thus, investing in these companies, which have an earnings beat potential, should yield strong returns for your portfolio in the short term.

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