The automobile market is tuning up, evidenced by the First Trust NASDAQ Global Auto Index (NASDAQ:CARZ) trending higher over the past three months. The exchange traded fund gained 22%, while the broad-market SDPR S&P 500 (NYSEARCA:SPY) gained 6% over the same time period.
The U.S. SAAR (seasonally adjusted annual rate of sales) rose steadily from a rate of about 14 million in July to about 15.5 million in November and December, Credit Suisse analysts noted in a "2013 Auto Sector Outlook" released Jan. 11. That's gaining on the 16.15 million vehicles sold in 2007," Trang Ho wrote for Investor's Business Daily.
On a global scale, consumers bought 4.4% more cars in 2012 than they did in 2011. This equals roughly to 78.8 million cars sold last year, with analysts calling for 81.1 million estimated car sales this year. Projected sales are expected to rise in the U.S. and China this year, with a decline in sales anticipated in Japan and Western Europe in 2013.
China is expected to bolster the auto industry sales heavily this year. An estimated 66 million Chinese households are reported to be able to buy a new car this year, a 50% increase in the number of cars currently on the road in China, according to a Scotiabank report.
Further supporting a run-up in CARZ is the low inventory-to-sales ratio that is present should production remain at the same level as 2012. The inventory-to-sales ratio would drop to 2.06 under this circumstance if sales rise to 15.3 million as forecast. For the inventory-to-sales ratio to its pre-recession average of 2.62, U.S. auto makers have to boost production by 4.6% - or 705,000 vehicles - from 2012 levels, reports Ho.
CARZ is currently trading at cheaper valuations than the industrial sector. The ETF is a play on 35 auto makers from 10 countries with a market cap pf at least $500 million. Christopher Ceraso, analyst at Credit Suisse, said in the report:
For the stocks to move much higher, investors have to either willingly overpay for the near-term production environment, or expectations for North American or European production have to move higher.
First Trust NASDAQ Global Auto Index
Tisha Guerrero contributed to this article.
Disclosure: I am long SPY. Tom Lyndon's clients also own SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.