Performance of the auto sector has been somewhat weak so far in the fourth quarter. This was more or less expected though as issues like high incentives, recall-related expenses and unfavorable foreign currency fluctuations were plaguing this space.

As a result, auto companies, which have posted results as of Feb 3, recorded a year-over-year decline of 33.8% in earnings and 3.9% in revenues, per our Earnings Preview report.  However, despite the decline, almost 75% of the companies beat on revenues, while 25% surpassed earnings estimates.

In comparison, total S&P 500 index members that have reported results as of Feb 3 posted a 6.9% increase in earnings on 4.2% higher revenues. The earnings and revenue beat ratio for these companies was 68% and 54.5%, respectively.

Exceptions to the Trend

Although on the whole, the auto sector is underperforming, some companies like Delphi Automotive PLC and Honda Motor Co., Ltd. (HMC Quick QuoteHMC - Free Report) have gone against the trend by posting better-than-expected results.

Several others are expected to outperform in their upcoming release too. These companies are benefiting from strong auto sales in key markets including the U.S., China and Europe. Moreover, low fuel prices are driving sales of higher-margin vehicle segments such as SUVs and light trucks, which is in turn helping automakers.

Investors looking to invest in this sector may consider these stocks as they seem poised to outperform estimates. Note that a strong earnings report generally leads to immediate price appreciation.

How to Pick the Right Stocks

While nearly 40% of auto companies have already reported quarterly numbers, quite a few players are yet to announce results. However, given the large number of participants in the auto industry, it might be difficult to shortlist stocks that have the potential to beat earnings estimates.

This is where the Zacks proprietary methodology comes in handy. It narrows down the list by helping select stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.  You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate. It helps in picking stocks that have high chances of posting a positive earnings surprise in their next earnings announcement.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. Here, we have selected five stocks from the automobile sector with the right combination of elements to report an earnings beat this season.

Cummins Inc. (CMI Quick QuoteCMI - Free Report) has an Earnings ESP of +0.99% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here. 

The Zacks Consensus Estimate for the company’s earnings is pegged at $2.02. Cummins posted positive earnings surprises in three of the trailing four quarters, with an average positive surprise of 5.13%.

This designer, manufacturer and distributor of diesel and natural gas engines, electric power generation systems, and engine-related components, fuel systems, controls and air handling systems will report fourth-quarter 2016 and full-year results on Feb 9.

Magna International Inc. (MGA Quick QuoteMGA - Free Report) has an Earnings ESP of +0.74% and a Zacks Rank #3. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is $1.36. Magna International managed to beat earnings in all of the last four quarters, delivering a positive average surprise of 5.14%.

Magna International is a leading manufacturer and supplier of automotive components. The company’s fourth-quarter 2016 and full-year financial results are expected to be released on Feb 24.

American Axle & Manufacturing Holdings Inc. (AXL Quick QuoteAXL - Free Report) has an Earnings ESP of +4.41% and a Zacks Rank #3. The Zacks Consensus Estimate for the company’s fourth-quarter earnings is 68 cents. The company delivered positive earnings surprises in each of the trailing four quarters, with an average beat of 10.7%.

American Axle is a leading supplier of driveline and drivetrain systems, modules and components for the light vehicle market. The company is expected to report fourth-quarter 2016 and full-year financial numbers on Feb 10.

Fox Factory Holding Corp (FOXF Quick QuoteFOXF - Free Report) has an Earnings ESP of +6.67% and a Zacks Rank #2. The Zacks Consensus Estimate for its fourth-quarter earnings is pegged at 30 cents.

Fox Factory has a history of outperforming earnings estimates. The company posted positive earnings surprises in each of the trailing four quarters, with an average beat of 13.76%.

Fox Factory is a designer, manufacturer and marketer of suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles, off-road vehicles, all-terrain vehicles, snowmobiles, specialty vehicles, and applications and motorcycles. It is expected to report fourth-quarter 2016 and full-year financial results on Mar 6.

Visteon Corporation (VC Quick QuoteVC - Free Report) has an Earnings ESP of +4.44% and a Zacks Rank #3. The Zacks Consensus Estimate for the company’s fourth-quarter earnings stands at $1.35.

Visteon posted positive earnings surprises in each of the trailing four quarters, with an average beat of 47.16%.

Visteon operates as an automotive supplier engaged in the design, engineering and manufacturing of innovative climate, electronic, interior and lighting products for vehicle manufacturers. The company’s fourth-quarter 2016 and full-year results are expected to be released on Feb 23.

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