4 Auto Stocks Set for Q3 Earnings Beat Amid Industry Headwinds
While the auto industry is currently facing chip crunch-related headwinds, stocks like CARG, VRM, PTRA and LEV look well poised to pull off third-quarter 2021 earnings beat.
The third-quarter earnings season for the Auto-Tires-Trucks sector is essentially over, with all S&P 500 sector components having reported their numbers. Per the latest Earnings Trend report dated Nov 3, 75% of the S&P 500 auto companies managed to deliver earnings and sales beat. Yet, earnings and revenues of these firms declined 12.3% and 2.6% year over year, respectively.
With just a few auto companies left to release third-quarter 2021 results, we will identify the ones that are poised to trump earnings estimates. But before that, let’s take a look at the factors shaping the quarterly performance of automotive companies.
Factors at Play
Microchip famine caused a major supply-demand imbalance in third-quarter 2021, with automakers forced to idle production lines across the world. Although buyers’ appetite for personal vehicles was quite strong, the auto industry was unable to meet the mounting demand. Overall earnings for the sector declined primarily because the space’s big operators like General Motors and Ford could not make as many cars as expected as a result of COVID-related supply-chain disruptions and semiconductor shortage.
Meanwhile, what seemed to have offered some respite amid low volumes is the higher average selling price of cars. The soaring popularity of electric vehicles (EVs) and shift toward digital shopping are also likely to have aided sales. Auto dealers ramped up their digital capabilities to make deals with customers and arrange for home deliveries of vehicles. The launch of a simple, secure and user-friendly online platform is expected to have helped in seamless end-to-end digitization of the companies’ sales processes.
Nonetheless, the industry battled high cost of raw materials, and labor and logistical challenges, which hurt third-quarter margins. The challenges gripping the auto sector are evident from the year-over-year decline in overall profits and sales for most of the industry participants this reporting cycle.
Making the Right Choice
Amid this backdrop, it is wise to select auto stocks that are well positioned to beat on earnings in their upcoming releases. While it is not possible to be absolutely sure about such outperformers, our proprietary methodology — Earnings ESP — makes it relatively simple. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
The combination of positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. Earnings ESP shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with the above-mentioned combination, the chances of an earnings beat are as high as 70%.
Below we present a few auto stocks that have the right combination of elements to pull off earnings beat for the third quarter:
CarGurus CARG: This Cambridge-based auto e-retailer, with an Earnings ESP of +2.06% and a Zacks Rank #3, is scheduled to release quarterly earnings on Nov 9. The Zacks Consensus Estimate for earnings has moved north by 4 cents per share over the past 90 days. Coming to earnings surprise history, CarGurus surpassed estimates in each of the trailing four quarters, with the average being 52.3%. The firm’s focus on building a rich and positive user experience for car buyers as well as delivering valuable sales is likely to boost prospects. The company’s balance sheet strength bodes well. For third-quarter 2021, CarGurus expects to generate revenues in the band of $210-$216 million, indicating an increase from $147 million recorded in the year-ago period.
Vroom VRM: This New York-based online used car seller, with an Earnings ESP of +0.68% and a Zacks Rank #3, is scheduled to release quarterly earnings on Nov 9. Vroom operates under three main business segments — Texas Direct Auto, e-commerce and wholesale. The e-commerce business, built on its online marketplace for buying and selling used vehicles, is the firm’s key growth engine and forms the bulk of the top line. For third-quarter 2021, Vroom expects e-commerce sales of 20,000-20,500 units, signaling a 130% year-over-year growth at the mid-point of the guided range. The recent acquisition of United Auto Credit Corporation is set to bolster Vroom’s captive financing capabilities, and unlock significant value for the business and stakeholders.
Proterra PTRA: This California-based EV company, with an Earnings ESP of +9.09% and a Zacks Rank #3, is scheduled to release quarterly earnings on Nov 10. It is a notable name in commercial vehicle electrification technology. The company, which went public this year, is currently suffering from losses (as with the case with most pure-play EV firms) but is actively focusing to generate positive free cash flow in the next few years. For first-half 2021, Proterra generated revenues of $113 million, up from $95.2 million in the corresponding period in 2020. The company has guided for $246 million of sales for the full year, indicating year-over-year growth of 25%. The long-term battery-cell supply deal with LG Energy Solutions augurs well. Collaborations with Daimler and Komatsu are set to boost top-line growth.
Lion Electric LEV: Headquartered in Montreal, Lion Electric is a manufacturer of all-electric medium and heavy-duty urban vehicles. The company, having an Earnings ESP of +113.56% and a Zacks Rank #2, is scheduled to release quarterly earnings on Nov 10. The Zacks Consensus Estimate has improved from a loss per share of 4 cents to earnings of 30 cents over the past 30 days. Its order book of 965 all-electric medium- and heavy-duty urban vehicles (as of Aug 12) represents a total order value of more than $280 million and positions it well to carve out a strong share in the growing electric bus market. Recent orders of 1,000 electric school buses from the Student Transportation of Canada and 35 zero-emission LionC school buses from Groupe Autocar Jeannois are noteworthy. The company is on track to launch eight vehicles by 2022-end, which is set to boost prospects further.
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