An O'Reilly Automotive auto-parts store in Louisville, Ky.
Luke Sharrett/BloombergCar earnings are on fire—which might seem like a surprise amid a pandemic. But several trends boosted results and, more important, several of them look like they have legs.
Car makers Ford Motor (ticker: F), parts supplier Aptiv (APTV), and aftermarket parts seller O’Reilly Automotive (ORLY) all reported better-than-expected third-quarter earnings. That trio join other auto-related stocks beating earnings estimates, including TE Connectivity (TEL), Littelfuse (LFUS), Gentex (GNTX), Autoliv (ALV), and Illinois Tool Works (ITW).
Things are clearly better than Wall Street expected. But the stocks, for the most part, aren’t moving. The auto group is down 4.4% on average over the past week. Market weakness is largely to blame: The S&P 500 is off 4.2% over the same span. The Dow Jones Industrial Average is down 6%.
Market issues aside, here’s what is going right:
- Global Sales Recovery. Chinese automotive sales rose 12% year over year in September. Sales there are completely recovered, and then some, from pandemic-induced lows. European sales rose 8% compared with September 2019. And light-vehicle sales in the U.S. are a hair below pre-Covid levels.
- Low Inventories. Along with better sales, inventories are low. That means sales at Ford and General Motors (GM) can rise in 2021 as dealers replenish stocks. It’s also good for automotive suppliers who feed into auto-maker assembly lines. “The build schedule looks strong in all regions,” Aptiv CEO Kevin Clark tells Barron’s.
- Used-Car Prices. Used car prices are higher, which, as RBC analyst Joseph Spak points out, boosted Ford Motor Credit performance in the third quarter. Cars coming off lease could be sold for very attractive prices. Ally Financial (ALLY) stock is down almost 8% over the past week. Capital One Financial (COF) shares have fallen almost 5%. They are both in the business of auto loans too. Based on Ford’s results, investors might be too negative on the outlook for auto loans.
- Tight Markets. Rising production, rising prices, rising sales: Car markets are tight, and that’s driving people into parts retailers. Same-store sales growth at O’Reilly was 16.9% in the third quarter. Earnings came in at $7.07 a share. Wall Street was looking for $6.22. “O’Reilly continues to surpass expectations and generated robust revenue growth, with demand from do-it-yourself customers being particularly strong,” Centerstone associate portfolio manager, and O’Reilly shareholder, Zachary Dimmerman tells Barron’s.
Investors are worried about Covid-19 and the election. That focus means good news for car stocks is being overlooked. That’s a recipe for stock gains in the not-too-distant future.
Write to Al Root at allen.root@dowjones.com
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October 30, 2020 at 06:28AM
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Ford, O’Reilly, and Others Crushed Earnings. What It Means for Auto Stocks. - Barron's
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