With the benchmark index S&P 500 at its five-year high, one would expect that all other economic indicators would be marching ahead in tandem. However, one indicator that has not been keeping up with the overall buoyant sentiment all around is monthly auto sales.
With the economy showing signs of recovery, can we expect auto sales to pick up in coming years? If yes, is it sufficient ground to believe that automakers like the General Motors (GM) present a good investment opportunity?
When we see from the bottom the auto industry seems to on the road to recovery, slow but steady, mostly because it saw a sharp deterioration during the recession.
Officially, recession, the most severe since the Great Depression of 1929, ended in June 2009 in the U.S. However, the economy still shows signs of weakness - household incomes have declined more after the beginning of the recovery than they did during the recession. Per capita income in the U.S. was $26,708 in 2011 - down 0.64% in one year and 7.33% down in three years. Figures for 2013 are to be released later in September/December 2013.
Before the U.S. recession, between 2002 and 2007, anything between 16 to 17 million cars and light trucks were being sold in America. Comparable figure for the year ended February 2013 is 15.3 million.
According to a report by the Federal Reserve, referred in the Washington Post, the 2007/2009 recession removed the gains made in two decades in American wealth. The drop in incomes obviously exposes the soft underbelly of what is generally believed to be a recovering economy.
Auto manufacturers however can derive some comfort from news that not only the size but also the length of average car loan is getting bigger. Moreover, with the improvement (albeit slow and small) in the economy, lenders are more comfortable writing auto loans even to people with low credit scores.
Another factor that has the potential of significantly impacting future auto sales is the fact of low interest rates. The low interest regime has benefited homebuilders to a great extent, which is evident from appreciation in stocks related to home builders. Auto stocks however have not yet showed a similar trend until now, probably the reason why some analysts forecast that recovery in the auto sector is on the cards.
General Motors owns automobile brands such as Buick, Chevrolet, GMC, Cadillac, Opel, Daewoo, Holden and Vauxhall. It is $38.09 billion (market cap) auto manufacturer that operates in four segments: GM North America (GMNA), GM Europe (GME), GM International Operations (GMIO) and GM South America (GMSA).
After bankruptcy filing and government bailout in 2009, the company is often referred to as "Government Motors." Pursuant to section 363 of the U.S. Bankruptcy Code, the United States operations of the company were purchased by a "NEW CO" with an unprecedented support from the U.S. and Canada governments and the United Autoworkers Union.
In the most recent earnings report, General Motors reported a 10.8% sales growth in net sales and revenue for the company's China joint ventures. However, overall net annual income for FY 2012 was considerably less than prior year - down from $9.19 billion to $6.19 billion. Worldwide production in 2012 was 9.49 million units representing an increase of 2.4% over 2011 and 8.89% over 2010. Capacity utilization in General Motors' North America segment rose from 95.6% to 97.5%.
These figures apparently suggest that General Motors is on the road to recovery. However, the flipside is a bit worrying. Information contained in the company annual report shows that the gross margin in 2012 has actually declined by $8.42 billion, representing a fall of 45.6% as compared to 2011. Cost of sales, on the other hand, increased by 7.6%
The company has an abysmally low operating margin of less than 2% and a profit margin of 4.06%. This is dangerously low for a capital intensive industry especially where installed capacity, at least in the U.S., Japan and Germany, to name only a few, is much in excess of local demand.
Ford reported its highest fourth quarter profit before tax in more than a decade. Profit before tax for FY 2012 stood at $8 billion and net income at $5.7 billion. The company posted an increase of 41 percent in sales in Q4 FY2012 and increased its market share from 2.8% to 3.4%.
Toyota, on the other side, has staged a spectacular comeback and snatched the number one position of the world's largest auto manufacturer from General Motors. In terms of units, the company sold more vehicles in nine months ended December 2012, not only in North America but across all regions including Japan, Europe, Asia and Central and South America -total unit sales increased by 1.634 million units. Total revenue increased by 26%.
However, tensions with China over claims on disputed islands, is likely to be a major hurdle for Toyota going forward. Toyota is trying to recover the market it lost in China by offering major discounts.
With 17.5% market share, General Motors is number one in the U.S. auto market for passenger cars, trucks and crossovers with Ford Motor Company a close second at 15.2% followed by the Japanese auto major, Toyota Motor Corporation. The point to note here is that while market shares of both GM and Ford have declined in 2012, Toyota and Honda Motor Company have increased their market share.
However, General Motors has an advantage as it is a pioneer of the current global trend in cars - fuel efficiency. Its presence in high-growth but energy deficient markets like India and China is likely to offset the slow growth in domestic market. Moreover, it is likely to get a major boost in fortunes due to its heavy investment in R&D for developing new models from its low-cost manufacturing facilities in these countries.
At the same time, there is no end to GM's European worries.
GM's German subsidiary, Opel, has been reporting heavy losses for some years now. In 2012, it reported a loss of $1.8 billion. General Motors has rejected numerous calls for selling Opel and is continuing with its revival plan despite failure of its previous efforts to resurrect Europe's third largest and General Motor's second largest auto brand. This can prove to be a big drain and adversely affect GM's financials.
In addition, Europe has reported some of the worst sales figures in the last six months. Optimists may say that a European turnaround is just round the corner but it is hard to believe. Even if Europe does turn around, it is going to be quite some time before it reflects in improved car sales.
The stock has appreciated more than 10% in last one year. However, it still looks attractive at current P/E of less than 10. There is also an opportunity for profit accruing from mandatory conversion of privately held Series A stock. But these are not fundamental to the company's operating performance. If General Motors has to become fit again and regain its premier position in the global auto market, the most likely savior seems to be markets like China and India, where sale figures are increasing slowly but surely.