What RBC Analysts Are Watching In The Auto Space Ahead Of Earnings
In a report published Tuesday, RBC Capital Markets analyst Joseph Spak previewed the U.S. Auto and Auto Parts sector ahead of earning season, noting that first quarter results should be "fine" but the larger focus will be on the outlook.
According to Spak, foreign exchange translation is a "real issue" as many companies have already issued guidance based on a U.S. dollar exchange rate of 1.20 versus the euro, potentially causing issues given the analyst's go-forward exchange rate of only 1.05.
"We believe many investors are waiting for a pullback to get more aggressive in the space," Spak wrote. "However, despite the fact that numbers need to come down, we're not sure the stocks do as we believe the group is generally better to buy. Foreign exchange translation impacts many industrial sectors but suppliers are still showing strong organic growth, good earnings growth/margin expansion and strong cash generation/buybacks."
Near Term Positioning
Spak stated that both Ford Motor Company (NYSE: F) and General Motors Company (NYSE: GM) are likely to post strong first quarter results on positive North American price and mix along with a lower than initially thought European loss.
Meanwhile, Johnson Controls Inc (NYSE: JCI) stock is supported by data points that suggest the North American institutional market is improving and if order trends are positive, the stock will react favorably.
Spak added that BorgWarner Inc. (NYSE: BWA) issued conservative guidance, and upside exists to consensus forecasts. The analyst also stated if the company reiterates it guidance at a lower euro rate that "should be good enough."
Lear Corporation (NYSE: LEA) already adjusted its 2015 outlook to adjust for foreign exchange, thereby de-risking the event and setting up for a potential first quarter beat. On the other hand, Autoliv Inc. (NYSE: ALV) was a beneficiary of foreign exchange transactions that could drive first quarter upside, the analyst noted.
Spak stated that he is "significantly below" Street estimates on Dana Holding Corporation (NYSE: DAN) as the consensus estimates doesn't properly reflect conditions in certain end-markets and foreign exchange updates.
Finally, Spak likes the mid-term setup in Tenneco Inc (NYSE: TEN) as expectations are very low.
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