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Revved Up Auto Sector Earnings Outlook

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We shared with you last week the unprecedented earnings boom enjoyed by the Construction sector. But the Construction sector is hardly alone in that respect, as you will see in the details of the Zacks Auto sector.

The Zacks Auto sector encompasses the original equipment manufacturers, both domestic and foreign, plus parts suppliers and tiremakers. Electric vehicle operators like Tesla (TSLA - Free Report) and its competitors are also housed here. The automobile dealerships like O’Reilly (ORLY - Free Report) and CarMax (KMX - Free Report) are not included here, but rather part of the Zacks Retail sector. Those automobile retailers have been raking it in lately as well.

Profitability of the Zacks Auto sector suffered last year as the pandemic had a debilitating effect on the group’s operations. But the group’s earnings were on a downtrend in the pre-pandemic period as well, as it was coming off four years of record earnings in the 2015 – 2018 period.

The chart below looks at the Zacks Auto sector’s aggregate earnings picture from 2003 through 2023.

 

 

As you can see, the Zacks Auto sector is currently expected to earn $21.1 billion in aggregate earnings this year, up +43.8% from the 2020 level and a new all-time record for the group. But this isn’t a one-off growth spurt, as the sector’s 2022 and 2023 earnings are expected to be new records in their own rights.

The Q1 earnings season has come to an end for the Zacks Auto sector. Total Q1 earnings for the sector were up +608.9% from the same period last year on +11% higher revenues, with 87.5% beating EPS estimates and the same proportion beating revenue estimates.

The outsized Q1 earnings growth is primarily a function of easy comparisons, as the final month of the year-earlier period was disrupted by the Covid lockdowns, which carried into 2020 Q2 when the sector as a whole lost money.

These stocks have pulled back significantly since February, but that came after a rip-roaring performance, with the sector as a whole still up almost twice as much as the S&P 500 index over the past year (+87.9% vs. +46%), as the chart below shows.

It is reasonable to expect the group to find its footing soon given the very strong profitability outlook.

Q1 Earnings Season Scorecard (As of Friday, May 14th)

We now have Q1 results from 458 S&P 500 members or 91.6% of the index’s total membership. Total earnings (or aggregate net income) for these 458 companies are up +46.4% from the same period last year on +9.5% higher revenues, with 86% beating EPS and 76.6% beating revenue estimates.

The reporting cycle starts winding down for these large-cap companies going forward, with about 200 companies on deck to report Q1 results, including 18 S&P 500 members. Walmart (WMT - Free Report) , Target (TGT - Free Report) , Home Depot (HD - Free Report) and others are some of the notable companies reporting results this week.

The two sets of comparison charts below put the Q1 results from these 458 index members in a historical context, which should give us a sense how the Q1 earnings season is tracking at this stage relative to other recent periods.

The first set of comparison charts compare the earnings and revenue growth rates for these 458 index members.

The growth comparison is likely not fair, given the unusually high year-over-year growth rates in the Finance sector, a function of big reserve releases and easy comparisons in 2021 Q1. On an ex-Finance basis, the Q1 earnings growth for the remaining companies that have reported results drops to only +34.1%.

But even on an ex-Finance basis, the Q1 earnings growth rate still compares favorably to other recent periods, as the chart below shows.

The second set of charts compare the proportion of these index members beating EPS and revenue estimates.

Overall Expectations for 2021 Q1

Looking at Q1 as a whole, combining the actual results that have come out with estimates for the still to come companies, total earnings for the S&P 500 index are expected to up +46.7% on +9.5% higher revenues. In other words, the remaining 42 index members still-to-report Q1 results aren’t expected to move the growth needle in any significant way.

The table below shows summary expectations for 2021 Q1, contrasted with what was actually achieved in 2020 Q4.

The chart below takes a big-picture view of the quarters, showing Q1 earnings and revenue growth highlighted and shown in the context of what was actually achieved in the last few quarters and what is expected in the coming periods.

The chart below shows quarterly earnings totals or quarterly aggregate net income, instead of year-over-year growth rates. This gives us a better appreciation of the pandemic’s earnings imapct and the resulting easy comparisons that are helping the growth rate in Q1 (and even ‘bigly’ in Q2).

That said, the 2021 Q1 total at $427.4 billion is a new all-time quarterly record.

The chart below presents the big-picture view on an annual basis. As you can see below, 2021 earnings and revenues are expected to be up +32.7% and +9.7%, respectively, which follows the Covid-driven decline of -13.1% in 2020.

On an index ‘EPS’ basis, the 2021 expectation works out to $180.46, up from $135.98 per ‘Index share’ in 2020.

These full-year estimates have been going up as well, as the chart below shows.

We envision this favorable revisions trend to accelerate over the next few months as the vaccination effort reaches a critical mass and greater ‘normalcy’ returns to life.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Earnings Estimates Keep Going Up 

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