We are at the tail end of the fourth-quarter earnings season and auto stocks seem to be racing ahead of estimates. As of Feb 10, 2016, around 80% of the auto stocks had reported earnings with an average beat ratio of 62.5%. Moreover, the growth rate of earnings for these companies was 9.1%.
 
Once all the auto stocks report their results, the earnings growth rate for the sector is expected at around 8.2% for the quarter compared with a negative growth rate of 6.5% expected from all the S&P 500 companies. Moreover, the auto sector is expected to rank third among the 16 Zacks sectors in terms of year-over-year increase in average earnings for the fourth quarter.
 
It is worth noting that the automobile space recorded an impressive 30.7% year-over-year earnings growth in the third quarter of 2015 – the highest among the 16 Zacks sectors.
 
Growth Drivers
 
The expected earnings growth for the fourth quarter will no doubt be fueled by strong vehicle sales in the key markets. U.S. light-vehicle sales increased 5.7% year over year to an all-time record of 17.47 million units in 2015. This is the sixth consecutive year of rising sales. Auto sales in China also increased 4.7% year over year to a record 24,597,600 units in 2015. Robust sales all year round must have had a positive influence on fourth-quarter results.
 
Further, the recovery in the European automobile market continued last year with a 9.3% year-over-year increase recorded in passenger car sales, according to the European Automobile Manufacturer’s Association.
 
The sales growth is expected to continue this year, with projections of a 2.7% rise in global vehicle sales to nearly 89.8 million vehicles by IHS Automotive. Low fuel prices, attractive financing options and impressive vehicle launches are giving a solid boost to vehicle sales.
 
Concerns
 
Although earnings of the auto companies are improving significantly, revenues are going down. Total revenues of the companies that had reported their financial results by Feb 10 declined 1.3% year over year in the fourth quarter of 2015. Moreover, this rate of decline is expected to be maintained till the end of the earnings season. Adverse foreign currency fluctuations and heavy discounts have had a significant adverse effect on revenues of many companies.
 
Meanwhile, a slowdown in sales growth in China is a concern for automakers. By the end of 2015, the growth rate of sales fell 2.2 percentage points from 2014 end. Even in Europe, sales growth is expected to be slower this year. Per the European Automobile Manufacturer’s Association, passenger car sales are expected to increase only 2% in 2016 compared with 9.3% growth recorded in 2015. Moreover, the massive volume of recalls due to the defective Takata airbag inflators and the Volkswagen AG (VLKAY) emission scandal will significantly inflate automakers’ expenses this year.