Data on auto sales for last month is released at 2 p.m. EST today with mixed expectations following last month's hurricane-induced weakness. Sales last month dropped by 600,000 to a seasonally-adjusted annual rate of 14.3 million, the weakest month since July. Year-over-year, sales still showed a healthy increase of 7% though well off the 13% growth in September.
While some analysts are expecting further weakness from Hurricane Sandy to come through in sales, others are calling for a strong rebound as incentive spending ramped up and many in the Northeast replace damaged autos. The website TrueCar.com is expecting a strong rebound in sales, up 13.1% from a year ago to a seasonally adjusted 15.2 million. The website cites estimated incentive spending of $2,765, the highest since August 2010, as a driver impetus behind the increase. A strong recovery in sales off of last month may help boost shares of major automakers but much of this year's strength in consumer sales may already be factored into prices. A stronger play on the recovery in sales may be further down the revenue stream in insurance carriers.
The majors still look relatively cheap
Shares of General Motors (GM) are up 21.5% since September when I recommended the company on valuation and positive support from foreign sales. TrueCar.com estimates November sales will be up 9.0% from the same month last year. Incentive spending at GM was the second-highest of the eight carmakers surveyed by the website at $3,720 per car. The company recently announced a $1 billion investment for a third plant in China to meet strong demand. The new plant will increase production by 400,000 vehicles per year and should bring the joint venture closer to its 2 million vehicle per year goal by 2015.
GM trades relatively cheaply at 8.2 times trailing earnings but pays no dividend and the company's operating margin of 3.3% is below 60% of peers in the industry. While there may still be some upside in the shares due to a strong rebound in sales, the recent price appreciation may have investors sitting out for a while.
Shares of Ford Motor (F) have underperformed General Motors by 8% since I recommended using the shares as a hedge against stronger fundamentals at GM. TrueCar.com estimates November sales will be up 1.5% from the same month last year and incentive spending offered by the company was the third lowest of the eight carmakers surveyed by the website at $2,307 per car. Ford announced last week that it was recalling almost 90,000 cars and SUVs because of reported overheating that could cause engine fires. The recall includes models from the popular Escape series as well as two models from the Fusion series.
Ford also trades relatively cheaply at 8.9 times trailing earnings and pays a 1.8% dividend yield. The company's operating margin (4.9%) is slightly higher than that of GM, but still only higher than 63% of peers. Sales data has lagged rival GM and the recent recall may act as a headwind to the shares.
Playing strong auto sales and getting the housing recovery to boot
I have been looking to the insurance industry as a way to play the recovery in housing. With the homebuilders and most other stocks in the sector looking extremely expensive, I have been looking further down the revenue stream. More homeowners mean more homeowner's insurance, so those insurers with a larger portion of revenue from the sector look interesting. Researching this article, it occurred to me that the same logic may work for auto sales as well. The sale of a new car usually requires some level of auto insurance to protect the asset. With a healthy rebound in auto sales this year, the industry could see a commensurate rebound in revenue.
While the insurers have seen some weakness recently on market fears related to losses due to Hurricane Sandy, the hurricane may end up driving the argument for rate increases. Regulators at the New York Department of Financial Services have started publishing claims data on the number and size of claims for insurance carriers in the aftermath of Hurricane Sandy. Investors may want to keep an eye on the data to assess fourth quarter earnings for companies in their portfolios.
The Travelers Companies (TRV) trades for a relatively cheap 10.1 times trailing earnings and pays a 2.6% dividend yield. The company's return on equity of 10.9% is above 70% of peers in the industry. The $27.0 billion holding company has a relatively large portfolio of auto and home policies with 18.2% of 2011 revenue from personal home policies, followed by personal auto (16.8%) and commercial auto (8.7%).
Progressive (PGR), the fourth-largest U.S. auto insurer, beat expectations when it reported third-quarter earnings of $0.27 per share on a higher underwriting profit margin. The company trades for a relatively expensive 14.4 times earnings but pays a 1.9% dividend yield and has a return on equity (14.7%) that is above 87% of peers in the industry. The $12.8 billion company is the most exposed to a rebound in auto sales with 90% of 2011 revenue from personal auto, followed by 10% of revenue from commercial auto.
The Chubb Corporation (CB) is relatively more exposed to the housing recovery with 21.1% of 2011 revenue from personal home policies and only 5.8% of revenue from personal auto. The majority of the company's revenue comes from its business line of commercial property and casualty. Shares trade for a relatively cheap 11.2 times trailing earnings and pay a 2.1% dividend yield. Despite a smaller exposure to personal auto and home, the shares are a strong play on the industry with a return on equity of 12.0%, higher than 77% of peers.
While some of the major manufacturers still look relatively cheap, sales of new cars have been especially strong this year and may level out over the next few months. Investors may still be able to pick up shares of companies like GM and Ford if they are willing to hold them over longer horizons. Shares of insurers offer a yet discovered play on the recovery and will benefit from the rebound in housing as well. Investors should look to those companies with a greater percentage of revenue from personal home and auto insurance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.