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Will CARZ ETF Gain Despite Mixed Auto Earnings?

The automobile, tires, trucks sector has come up with mixed results this reporting season. Notably, 75% of the S&P automobile companies beat on earnings and revenues. However, earnings declined 12.3% year over year and revenues were down 2.6%, as reported by the Earnings Trends issued on Nov 10. Notably, the First Trust NASDAQ Global Auto Index Fund CARZ has gained 26% in the year-to-date period, outperforming the SPDR S&P 500 ETF’s SPY rise of 25%.

The U.S. automobile sector has been attracting investor attention as the gradual reopening of U.S. and global economies highlights brighter prospects. The coronavirus vaccine rollout is gradually helping control the outbreak's spread across the globe. Accordingly, the global demand and economic growth levels are on the path of recovery from the pandemic-led slump. Vehicle demand is on the upswing, courtesy of the growing inclination toward personal mobility and easier credit conditions. Electric vehicles (EVs) are seeing greater popularity with each passing day and are likely to boost the prospects of automakers.

However, consumers seem disturbed about the rising prices of homes, vehicles, food and household durables. The Michigan survey has also highlighted that the buying conditions for household goods have declined to the second-lowest level since the recording of data began in 1978. The metric came in at a reading of 78 (per a Bloomberg article).

Against this backdrop, we take a look at some big automobile earnings releases and check if these can impact ETFs exposed to the sector.

Automobile ETF in Focus

Given the current scenario, it is prudent to discuss the following ETF that has relatively higher exposure to the major players in the space:

First Trust NASDAQ Global Auto ETF

The investment objective of First Trust NASDAQ Global Auto ETF is to seek investment results that generally correspond to the price and yield, before the Fund's fees and expenses, of an equity index called the NASDAQ OMX Global Auto Index.

First Trust NASDAQ Global Auto ETF comprises 34 holdings, with the below-mentioned companies carrying about 25% weight. CARZ’s AUM is $77.4 million and expense ratio, 0.70%. First Trust NASDAQ Global Auto ETF currently carries a Zacks ETF Rank #3 (Hold), with a High-risk outlook (read:  U.S. Inflation at a 30-Year High: 5 Sector ETFs to Win).

Earnings in Focus

Tesla TSLA is the market leader in battery-powered electric car sales in the United States, owning around 60% of the market share. In fact, the company’s flagship Model 3 accounts for about half of the U.S. EV market. On Oct 20, Tesla reported earnings per share of $1.86 for third-quarter 2021, beating the Zacks Consensus Estimate of $1.39.  The outperformance stemmed from higher-than-expected automotive gross profit, which came in at $3.67 billion, outpacing the consensus mark of $3.33 billion.  The earnings figure also compared favorably with the prior-year quarter’s earnings of 76 cents per share. Revenues rose to $13.76 billion, surpassing the consensus mark of $13.16 billion. The top line also witnessed year-over-year growth of 56.8%. During the third quarter, Tesla reported delivery and production of 241,391 and 237,823 vehicles, reflecting a year-over-year increase of 73% and 64%, respectively.

Tesla had cash and cash equivalents of $16.07 billion as of Sep 30, 2021, compared with $14.53 billion as of Sep 30, 2020.

Ford Motor Company F designs, manufactures, markets and services cars, trucks, sport utility vehicles, electrified vehicles, and Lincoln luxury vehicles. On Oct 27, Ford reported third-quarter 2021 adjusted earnings per share of 51 cents, outpacing the Zacks Consensus Estimate of 28 cents. Higher-than-expected profits, primarily in the North America and South America markets, drove the earnings results. However, in the prior-year quarter, the company had reported earnings of 65 cents.

During the reported quarter, Ford reported automotive revenues of $33.2 billion, which outpaced the Zacks Consensus Estimate of $31.7 billion. Ford had cash and cash equivalents of $27.43 billion as of Sep 30, 2021, compared with $25.24 billion on Dec 31, 2020.

One of the world’s largest automakers, General Motors GM, leads the U.S. market share with 17.1% of the industry’s total sales in 2020. On Oct 27, General Motors reported adjusted earnings of $1.52 per share for third-quarter 2021, beating the Zacks Consensus Estimate of $1.07. Stronger-than-expected contribution from its Financial segment led to this outperformance. The bottom line, however, compares unfavorably with year-ago quarter’s earnings of $2.83 per share. General Motors reported revenues worth $26.78 billion, down from the year-ago figure of $35.48 billion. Also, the revenue figure lagged the Zacks Consensus Estimate of $31.17 billion.

General Motors had cash and cash equivalents of $17.4 billion as of Sep 30, 2021, compared with $19.9 billion at the end of 2020.  The company recorded adjusted automotive free cash flow (FCF) of $4.39 billion for third-quarter 2021 comparing unfavorably with FCF of $9.12 billion in the prior-year period.

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