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Weekly Wrap: Expect More Disappointing Auto Sales

We still like Ford and GM despite low June numbers. Plus, value in O'Reilly amid dive in auto parts, and a positive big picture for Yum China.

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Jeremy Glaser: Auto sales slip, and we see the sell-offs in auto parts retailers and Yum China as an opportunity. This time on the Morningstar Weekly Wrap.

June auto sales were the worst of 2017, but analyst Dave Whiston says there's no reason to believe that sales are about drive off a cliff.

David Whiston: Automakers reported June sales on Monday, and the overall headline numbers don't look that great with sales down 2.9%. A theme I think you're going to see again and again every month for quite a while, the car segment models were down nearly 14%, whereas light truck models--things like pickups, crossovers, SUVs--were up over 4%. Also noteworthy was that the seasonally adjusted annual rate, SAAR, came in at 16.54 million, that was the lowest for June since 2013, and it was also the lowest SAAR of all of 2017 so far. Also interesting is that Ford's head of U.S. sales basically said even if we have a really great second half for the industry, we're not going to eclipse last year's record sales amount of 17.54 million, which isn't surprising. I think you need to expect more of the same going forward as the months go by here.

Good news for the American automakers, especially GM, is that light trucks are still very hot, making up about 63% of the market right now in a typical month. And GM's got all of their crossovers getting redone right now to compliment the one GMC crossover that got redone last year. This is vehicles like the Traverse, the Buick Enclave will be coming out later this fall, the new Equinox just came out--those vehicles continue to do very well even for June. GM's crossovers were up 23%. 

GM is probably the most undervalued stock in my coverage. Four-star, $51 fair value estimate. Really nice story if you like companies that buy back a lot of shares, too. They're gonna buy back about 10% of their market cap this year.

Glaser: Auto parts retailers took a dive this week after O'Reilly's disappointing sales report. Morningstar's Zain Akbari is trimming his fair value estimates for this sector, but he still sees opportunity.

Zain Akbari: Of the names in our coverage universe, we particularly like O'Reilly and AutoZone, just by virtue of their strong management teams. And Advance, on the other hand, does have a great opportunity for investors in that the discount to fair value is a bit higher. Now that said, that comes in the context of a broader turnaround that adds some uncertainty.

Glaser: Shares of Yum China sank on Thursday after some cautious management comments. But Morningstar's R.J. Hottovy thinks investors shouldn't miss the positive big picture here. Yes, there may be some short-term factors that will weigh on growth, bu the traction being gained by new menu items, improved delivery platforms, and the potential of dividend announcement by the end of the year should be seen as encouraging.

In case you missed it on this week, Christine Benz shared 10 lessons that she learned from her "faux-tirement."

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.