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Mixed Q2 Earnings Results Put Automotive ETFs in Focus

Sweta Jaiswal, FRM

The automobile/tires/trucks sector has reported mixed results so far this reporting season. Of the 87.5% S&P industrial companies that have reported so far, 42.9% beat earnings as well as revenue estimates. Earnings have risen 5.6% year over year and revenues 1.4%, per the Earnings Trends issued on Jul 31 (read: 5 Sector ETFs That Crushed the Market in July).

While the escalating Sino-US trade spat has been weighing on all sectors, the automobile sector is seeing a sea change. There has been a sharp decline in demand for sedans and hatchbacks with rising inclination toward spacious and more comfortable vehicles. An increase in mobility and ride-hailing services is prompting automakers to enhance new capabilities and opt for acquisitions (read: A Look at Auto ETF & Stocks Post Weak First-Half Sales).

However, improving economic fundamentals, low unemployment levels, growing consumer confidence, higher spending, fuel-efficient and technologically enriched vehicles, and strong demand for larger vehicles may drive the automobile industry growth in the future.

Against this backdrop, we take a look at some big automobiles earnings releases and see if these can impact ETFs exposed to the space.

Earnings in Focus

On Jul 24, Ford Motor Company F reported second-quarter 2019 adjusted earnings per share (EPS) of 32 cents, surpassing the Zacks Consensus Estimate of 30 cents. In the year-ago quarter, adjusted earnings were 27 cents. In the quarter under review, adjusted earnings before interest and taxes (EBIT) came in at $1.7 billion along with adjusted EBIT margin of 4.3%, both flat year over year. Excluding the Pivotal Software revaluation, adjusted EBIT would have amounted to $1.8 billion.

During the reported quarter, Ford reported automotive revenues of $35.8 billion, beating the Zacks Consensus Estimate of $34.5 billion. In the prior-year quarter, the figure was $35.9 billion.

Ford had cash and cash equivalents of $12.6 billion as of Jun 30, 2019 compared with $9.6 billion as of Dec 31, 2018. The stock has lost 10.6% since the earnings release (as of Aug 5).

On Aug 1, General Motors Company GM reported adjusted earnings of $1.64 per share in second-quarter 2019, down 9.4% from the prior-year quarter. However, its earnings surpassed the Zacks Consensus Estimate of $1.43. The company reported revenues of $36.1 billion, down 1.9% from the year-ago quarter. However, revenues outpaced the Zacks Consensus Estimate of $35.6 billion. During the quarter under review, total sales for the wholesale unit declined to 1.13 million from 1.2 million in the year-ago period. Worldwide retail units sold fell to 1.94 million from 2.07 million in second-quarter 2018.

General Motors had cash and cash equivalents of $17.1 billion as of Jun 30, 2019, compared with $20.8 billion as of Dec 31, 2018. Adjusted automotive free cash flow in the reported quarter was $2.53 billion versus $2.6 billion used in the prior-year quarter. The stock has lost 3.3% since the earnings release (as of Aug 5).

On Aug 2, Honda Motor Co., Ltd. HMC reported operating profit of ¥252.4 billion in the first quarter of fiscal 2020, down 15.7% from the year-ago figure. Profit before income taxes decreased 19.1% to ¥289.8 billion in the reported quarter. Profit per share attributable to owners of the parent was ¥172.3 billion, reflecting a 29.5% fall from the year-ago quarter. Revenues declined 0.7% year over year to ¥4 trillion. The decline can be largely atrributed to reduced sales revenues at Automobile, Motorcycle, Life creation and other businesses, and negative currency translation impacts. The negative factors were partly offset by better performance of the Financial services business.

Consolidated cash and cash equivalents were ¥2.39 trillion as of Jun 30, 2019, down from ¥2.49 trillion as of Mar 31, 2018. As of Mar 31, 2019, Honda’s net cash from operating activities amounted to ¥195.6 billion compared with the year-ago figure of ¥214.4 billion. The stock has lost 2.9% since the earnings release (as of Aug 5).

On Aug 2, Toyota Motor Corporation TM reported earnings of $4.32 per ADR in first-quarter fiscal 2020 (ended Jun 30, 2019), up from $4.08 in the year-ago quarter. Earnings beat the Zacks Consensus Estimate of $3.89. This Japan-based automaker delivered net income of ¥682.9 billion ($6.2 billion) in the quarter under review, up from ¥657.3 billion ($6 billion) a year ago. The company’s total net revenues rose to $69.5 billion (¥7.65 trillion) from the year-ago quarter’s $67.5 billion (¥7.36 trillion). The figure surpassed the Zacks Consensus Estimate of $67.9 billion.

Toyota Motor had cash and cash equivalents of ¥3.8 trillion ($34.5 billion) as of Jun 30, 2019, compared with ¥3.6 trillion ($32.7 billion) as of Mar 31, 2019. The stock has lost 0.5% since the earnings release (as of Aug 5).

Automobile ETFs in Focus

In the current scenario, it is prudent to discuss the following ETFs that have relatively high exposure to the companies discussed.

First Trust NASDAQ Global Auto Index Fund CARZ)

The fund tracks the NASDAQ OMX Global Auto Index. It comprises 33 holdings with the above-mentioned companies carrying 33.67% weight. Its AUM is $16.8 million and expense ratio is 0.70%. The fund carries a Zacks ETF Rank #3 (Hold) with a High risk outlook (read: June Retail Sales Beat Forecast: ETF & Stock Winners).

WBI Power Factor High Dividend ETF WBIY)

The fund tracks the Solactive Power Factor High Dividend Index. It comprises 51 holdings with 4.68% weight to Ford Motor Co. Its AUM is $95.7 million and expense ratio is 0.70% (read: Is Global X SuperDividend U.S. ETF (DIV) a Strong ETF Right Now?).

Invesco BLDRS Asia 50 ADR Index Fund ADRA)

The fund tracks the S&P/BNY Mellon Asia 50 ADR Index. It comprises 50 holdings with 11.28% weightage to Toyota Motor Corp and 2.87% weight to Honda Motor Co., Ltd. Its AUM is $17.4 million and expense ratio is 0.30%.

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Ford Motor Company (F) : Free Stock Analysis Report
 
General Motors Company (GM) : Free Stock Analysis Report
 
Toyota Motor Corporation (TM) : Free Stock Analysis Report
 
Honda Motor Co., Ltd. (HMC) : Free Stock Analysis Report
 
First Trust NASDAQ Global Auto Index Fund (CARZ): ETF Research Reports
 
Invesco BLDRS Asia 50 ADR Index Fund (ADRA): ETF Research Reports
 
WBI Power Factor High Dividend ETF (WBIY): ETF Research Reports
 
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