3 Top-Ranked Auto Stocks that Beat the Market in 2014

2014 turned out to be a mixed year for the auto sector with equal measures of positive and negative developments. Global auto sales surged significantly during the year, buoyed by strong sales in the U.S. and China and launch of several new and revamped vehicles. The declining oil and gas prices helped boost sales of larger vehicles such as trucks and SUVs.

However, the recent slowdown in the sales growth in China raised concerns, while the slow recovery in Europe also affected sales. Moreover, the auto sector witnessed an unprecedented number of safety recalls during the year, which not only increased the expenses of the automakers but also negatively affected stock prices.

Let's take a look at the major factors that influenced the auto sector in 2014.

U.S. Auto Sales Set to Hit 16 Million Units

For the first time since the Great Recession, U.S. auto sales look set to cross the 16 million unit mark this year. Sales til November amounted to 15 million units, highlighting a 6% year-on-year improvement. Sales on a seasonally adjusted annualized rate (“SAAR”) basis totaled 17.2 million units in Nov 2014, against 16.3 million in Nov 2013 and 16.5 million in Oct 2014.

Pent-up demand, attractive deals and impressive vehicle launches helped boost sales, while improving macroeconomic factors such as rising wages and household wealth, improving job security and falling gas prices acted as catalysts. Easier availability of car loans with favorable terms also played an important role in boosting vehicle sales.

Record-High 2014 Sales for China, Growth Rate Decelerates

Sales in the world's largest automobile market, China, reached new record high levels in 2014. In the first eleven months of 2014, the nation's sales surpassed 21 million units, improving 6.1% year over year, per China Association of Automobile Manufacturers (“CAAM”). In 2013, it had become the first nation to surpass domestic auto sales of 20 million units.

However, despite the impressive sales volume, the growth rate of sales in China has started showing sluggishness owing to slowing economic growth in the country. In November, the rate of growth had declined 7.4 percentage points in comparison to the previous year. The declining rate can be primarily attributed to lower sales of commercial vehicles, particularly trucks.

Auto Sales Recover in Europe, Albeit Slowly

The European market demonstrated partial recovery in 2014, after hitting a 20-year low in 2013. According to the European Automobile Manufacturer's Association, passenger car sales in the European Union improved 5.7% year over year in the Jan–Nov 2014 period, while commercial vehicle sales surged 8.8%.

However, passenger car sales grew only 1.4% in November, while commercial vehicle sales dipped 0.2%. Sales of both vehicle categories fell in Europe's largest market, Germany, and also in France. In fact, the year-over-year increase in passenger car registrations in November was the lowest in the last 12 months.

Declining Gas Prices Boost Vehicle Sales

The recent downturn in global oil and gas prices is benefiting automakers considerably. The average gasoline price in the U.S. currently stands at a five-and-a-half-year low. As fuel prices become more affordable, sales of gasoline-powered vehicles, especially the larger ones, are getting a boost. However, sales of hybrids and electronic vehicles might suffer from this trend.

Record-High Recalls: Bane for Automakers, Boon for Dealers and Parts Manufacturers

Automakers have recalled an astounding 60.5 million vehicles in the U.S. till mid-December this year, according to the National Highway Traffic Safety Administration (“NHTSA”). This figure is nearly the double of the previous record of 30.8 million vehicles in 2004. Moreover, these figures only cover the recalls in the U.S. and thus we can well assume that the global recall numbers will be much higher.

General Motors Company GM led the pack, with over 80 recalls covering more than 30.4 million vehicles, in North America alone. The company initiated a series of recalls after it became embroiled in various lawsuits and investigations for the delayed recall of vehicles with defective ignition switches. It had to pay a fine of $35 million to the U.S. safety regulators in relation to the late recall. This marks the maximum amount of monetary penalty which the government can impose.

Another major safety issue in 2014 was that of the defective Takata airbags. A manufacturing defect in the airbags caused metal fragments to shoot out on deployment, thus injuring or killing occupants. Nearly 20 million vehicles have been recalled globally by over 10 automakers due to the faulty airbags.

Apart from these, most major automakers kept announcing a string of recalls for various safety issues. These recalls intensified the financial burden of auto manufacturers, while increasing revenues for dealers and parts manufacturers.

3 Top-Ranked Auto Stocks that Outperformed the S&P 500 in 2014

The S&P 500 Index provided year-to-date (YTD) return of 12.7% (as of Dec 23, 2014). Let's take a look at 3 top-ranked auto stocks that provided better returns than the index in 2014. As these stocks carry a favorable Zacks Rank and have impressive long-term growth rate projections, we expect these stocks to continue to perform well in 2015 as well.

MI-based Meritor, Inc. MTOR is a global supplier of a broad range of integrated systems, modules and components for commercial, specialty and light vehicles worldwide. This Zacks Rank #1 (Strong Buy) stock enjoys a leading position in most of its markets and provided an YTD return of 38.8%. It also looks set to perform well in the future with an expected long-term earnings per share EPS growth rate of 29%.

IN-based Allison Transmission Holdings, Inc. ALSN is among the major manufacturers of commercial-duty automatic transmissions and hybrid propulsion systems globally. The company also supplies various auto parts and services customers through 1,400 independent distributor and dealer locations across the globe.

Allison Transmission sports a Zacks Rank #1 and yielded an YTD return of 22.8%. The company is expected to provide long-term EPS growth of 13.6%.

Magna International Inc. MGA, based in Aurora, Ontario, Canada, is a leading manufacturer and supplier of automotive components. The company designs, develops and manufactures automotive systems, assemblies, modules and components, apart from engineering and assembling complete vehicles, primarily for sale to original equipment manufacturers of cars and light trucks.

Magna International currently carries a Zacks Rank #2 (Buy). The company provided a YTD return of 31.1%. Its long-term EPS growth rate is projected at 12.1%.

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