Stepping on the Accelerator - Zacks Industry Rank Analysis

Industry Rank Analysis 11-10-10

The Auto industry was in shambles just over a year ago, with two of the big three in Chapter 11 bankruptcy, and very real fears that the industry was gone forever. Two of the big three are no longer publically traded, although GM should launch its IPO soon.

Auto sales have started to rebound, running at a rate of about 12.25 million in October, and while that is better than the sub 10 million pace that sales hit in the depths of the Great Recession, it is still far below the 16 to 17 million sales per year that used to be the norm for the industry.

The auto industry is, however, not confined to the U.S. and the largest auto market in the world today is China, not the U.S. Sales there have been booming. Most of the turnaround has been due to massive cost cutting. This is an industry with a lot of operational leverage, and if U.S. sales do eventually return to pre Great Recession levels, there is a lot of room for profits to continue to rise for several more years. 
 
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 (or bottom) 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.

Six “industries” in the overall Auto industry are showing up very favorably based on the Zacks Rank. The best of the bunch is the Foreign Automakers, coming in 6th place (tie) out of the 256 industries tracked, an improvement of 4 spots from last week. The average Zacks Rank for the nine firms in the group fell to 2.11 from 2.22.

The Domestic firms are not that far behind, in a tie for 16th place, unchanged from last week with an average score of 2.33. The Tire industry is in 10th place, an improvement of two slots from last week with an average score of 2.25.

The parts makers are also looking pretty good with the replacement parts industry, Jumping 33 spots to land in 23rd place due to an average score of 2.43, down from 2.71 last week. The OEM parts firms are a bit further back in 39th place, an improvement of 3 spots from last week. It, however, is by far the largest of the six related firms, at least by number of firms.

Industries with a large number of companies in them are much less likely to land at the top or bottom of the list than are firms with only two or three firms in the industry. The turnaround in the overall Auto industry has also helped the Auto dealers, which are in 42nd place, although that is a deterioration of five spots since last week.

The first table below shows the Auto and related stocks that hold the vaunted Zacks #1 Rank (Strong Buy).  The second table shows the #2 ranked (Buy) firms. There is a range of market capitalizations to choose from between the two lists, including some very large firms on the number one ranked list.

In addition, most of the firms also have very reasonable valuations, particularly if one is willing to look out to 2011 earnings. Between the two lists there are 29 firms, and ten are sporting single-digit P/E's. The combination of positive earnings momentum and inexpensive valuations can often put a portfolio's returns into the fast lane.

Number 1 Ranked Firms

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
Honda Motor	HMC	$64,747	10.74	11.37	38.46%	10.55%	$35.75
Volvo Ab Adr B	VOLVY	$30,549	16.95	10.92	54.54%	14.78%	$14.41
Contl Ag-Sp Adr	CTTAY	$17,381	23.11	15.41	13.94%	29.36%	$86.90
Tata Motors-Adr	TTM	$15,080	11.24	10.13	0.00%	0.00%	$29.78
Peugeot Cit-Adr	PEUGY	$9,467	7.31	8.07	19.44%	33.96%	$40.45
Carmax Gp (Cc)	KMX	$7,274	20.26	19.09	0.19%	0.17%	$32.35
Autoliv Inc	ALV	$6,728	12.42	11.45	8.09%	9.90%	$76.03
Wabco Holdings	WBC	$3,217	19.54	15.49	16.31%	6.38%	$49.93
Dorman Products	DORM	$741	17.67	15.97	6.08%	11.80%	$41.61
Lithia Motors	LAD	$331	14.89	11.04	8.97%	17.41%	$12.66
Sorl Auto Parts	SORL	$188	11.26	8.98	0.05%	0.66%	$9.76
Motorcar Parts	MPAA	$136	11.99	10.03	-2.08%	4.01%	$11.27
Strattec Sec Cp	STRT	$110	14.57	16.29	99.12%	20.83%	$33.07

Number 2 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
Ford Motor Co	F	$55,751	7.97	8.03	12.09%	5.88%	$16.21
Paccar Inc	PCAR	$20,140	44.2	21.24	4.81%	6.90%	$55.25
Magna Intl Cl A	MGA	$12,046	12.79	12.3	2.01%	0.38%	$99.46
Genuine Parts	GPC	$7,603	16.55	14.81	3.08%	3.40%	$48.24
Borg Warner Inc	BWA	$6,757	20.23	15.7	6.33%	6.17%	$59.26
Trw Automtv Hld	TRW	$5,918	9.32	8.92	7.67%	6.63%	$49.37
Lear Corporatn	LEA	$4,452	12.62	10.75	16.71%	8.95%	$90.00
Navistar Intl	NAV	$3,926	11.57	7.33	2.83%	0.00%	$54.76
Cooper Tire	CTB	$1,326	9.12	9.05	7.25%	3.15%	$21.58
Rush Enterprise	RUSHB	$590	26.76	12.05	18.00%	0.00%	$15.79
Titan Intl Inc	TWI	$565	43.75	25.55	21.67%	4.75%	$15.97
Superior Inds	SUP	$490	17.04	13.45	2.38%	0.00%	$18.36
China Auto Sys	CAAS	$458	15.61	13.89	0.15%	-0.41%	$16.88
Titan Machinery	TITN	$370	22.7	17.92	0.00%	0.00%	$20.75
Wonder Auto Tec	WATG	$355	12.2	7.77	0.00%	0.00%	$10.49
Americas Car-Mt	CRMT	$312	10.64	9.12	0.19%	1.45%	$28.74

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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