Autos in the Fast Lane - Zacks Industry Rank Analysis

Industry Rank Analysis 08-04-10

A year ago, the Auto Industry stood at the edge of the abyss. Two of the most storied names in the industry -- GM and Chrysler -- had recently gone bankrupt, but they did so in a prepackaged form, with substantial government assistance. As a result, we are all shareholders in the industry simply by virtue of being taxpayers.

What a difference a year makes. While GM and Chrysler are no longer publicly held companies (an IPO for GM will probably come by the end of the year), the other firms in the industry are doing remarkably well. The Auto-Truck-Tires sector is by far the strongest of any sector now with an average Zacks rank of 2.38. It is exceptionally rare to see an entire sector have an average rank that low.

Overall sales are up a bit from a year ago, but remain far below pre-recession levels. Still, all of the old “Big Three” and the vast majority of the suppliers are now profitable. This has been a remarkably successful restructuring story.

The Zacks industry classifications are very fine, with 256 different industries tracked. It is not particularly noteworthy if a single small industry shows up doing well -- a single firm with good news can propel a one- or two-firm industry to the top of the charts.

It is interesting when you see a cluster of similar industries at the top of the list. The same holds true for the bottom of the list.

There are four closely related industries in the sector that are near the top of the charts. The first two are very small, at least in terms of the number of companies involved. With GM and Chrysler gone, the Domestic Auto industry is down to just two firms, Ford (F), and big rig truck maker Paccar (PCAR). However, both of them hold the coveted Zacks #1 Rank, which gives this industry a perfect score, which incidentally it also had last week.

The Engine industry also has just two firms in it, and it is in a tie for 5th place among the 256 industries tracked with an average score of 2.00, also the same as last week. Normally I don’t highlight industries with just two firms in them, but the Auto industry is particularly important to the economy. Also, the overall industry is much bigger than just the firms in those two “industries.” 

It is not just the firms that put together the final car, but the firms that make the parts that go into them. For the most part, those firms are much smaller than the big automakers, but can post even bigger gains when things are going well (and can be just awful when the industry hits the skids).

The Auto OEM industry is not doing all that poorly, sitting in 17th place, an improvement of 6 slots from last week and an average Zacks rank of 2.32, down from 2.48 last week. In terms of the number of companies, it is a far larger industry than the final assemblers are at 31. Of those, six hold the coveted Zacks #1 Rank (Strong Buy) and an additional ten hold the attractive Zacks #2 Rank (Buy).

If the distribution of Zacks ranks were completely random, you would “expect” that just 20% of firms in an industry would hold a rank of #1 or #2. In the Auto Parts industry, 51.6% do.

Of course, Ford is not your only choice when you go to the dealer. Foreign Auto companies are a very significant part of the market. They are also doing well, right behind the parts firms in 18th place -- an improvement of 21 spots in the last week. The industry has an average Zacks rank of 2.33, down from 2.56 last week. There are nine firms in the Foreign Auto industry, with three #1s and two #2s.

The table below shows the stocks from industries that hold the coveted Zacks #1 Rank. Historically, Zacks #1 Ranked stocks have far outperformed the overall market. The firms range in size from large caps to micro caps, with more of the large caps being found among the Final brands like Ford or Toyota (TM) and the parts firms being mostly small- or mid-cap firms. As for valuation, these firms look a little on the expensive side, if you are just looking at this year’s earnings, but the earnings are very reasonable if you look out to next year.

Besides, these are super cyclical firms that you are supposed to by when the current P/Es are high. While it is unlikely that the U.S. will return to pre-recession levels of car sales any time soon, if that were to happen, these firms would all simply mint money given the inherent operating leverage that they have.

Just being in the black in the current economy is a very significant achievement considering the whole industry was more or less on death doorstep just a year ago.

Number 1-Ranked Stocks

Company	Ticker	Market Cap ($ mil)	P/E Using Curr FY Est	P/E Using Next FY Est	% Change Curr FY Est - 4 wk	% Change Next FY Est - 4 wk	Current Price
Toyota Motor Cp	TM	$114,104	18.95	11.71	1.45%	1.72%	$72.77
Honda Motor	HMC	$59,399	15.62	11.99	2.95%	2.82%	$32.73
Daimler Ag	DDAIF	$56,672	10.06	7.97	53.20%	26.64%	$55.34
Ford Motor Co	F	$43,484	7.43	6.86	30.58%	19.39%	$12.91
Paccar Inc	PCAR	$16,614	39.13	18.97	16.22%	4.32%	$45.53
Cummins Inc	CMI	$16,054	17.51	13.31	18.35%	11.48%	$80.04
Wabco Holdings	WBC	$2,463	17.42	12.75	14.05%	10.49%	$38.26
Federal Mogul-A	FDML	$1,882	16.94	11.09	18.25%	15.99%	$19.03
Arvinmeritor	ARM	$1,506	50.56	9.81	14.46%	2.94%	$16.01
Modine Manufact	MOD	$463	174.09	11.34	179.31%	5.37%	$10.01
Stoneridge Inc	SRI	$285	22.43	8.45	36.11%	9.24%	$10.99
Strattec Sec Cp	STRT	$64	10.66	7.68	37.59%	23.90%	$19.51

Sector Data

In evaluating the Zacks Industry Ranks, you want to see two things: a good overall score (low, meaning more Zacks #1 and #2 Ranked stocks than #4 or #5 Ranked stocks) and some improvement the relative position from the prior week. It is also helpful to understand exactly what the Zacks Industry Rank is.

The Zacks Industry Rank is the un-weighted average of the individual Zacks ranks of the firms in that industry. It does not matter if the stock is the 800 lb gorilla that dominates the industry or some very small niche player in the industry -- they have the same influence on the industry rank.

Also, that means that the bigger the industry in terms of number of firms, the less influence any given company has on the industry rank. It also implies that small industries, with just two or three firms, should be the ones found at either the top or the bottom of the list. After all, if there are only two firms in the industry, it is relatively easy to get a Zacks rank of 2.00 (i.e. one with a Zacks Rank of #1 and the other with a #3). Right now, that industry rank would be tied for 6th place among the 255 industries tracked.

The same obviously goes for the bottom of the list as well. If there are 50 firms in the industry, and it ends up at one of the extremes, that means there has to be something pretty significant going on. Thus, I do not always focus on the very highest rated industries, but on the highest rated ones in which there are a large number of firms.

Click here for the Zacks Industry Rank List: http://www.zacks.com/zrank/zrank_inds.php

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC. Dirk is also the Editor in charge of the market beating Zacks Strategic Investor service.

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