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Research firm Polk released a report earlier this week which indicated the average age of Light Vehicles continues to rise, hitting a record of 11.4 years as of January 1, 2013. Amid the prior year's strong sales and the slowly recovering U.S. economy, this news presents an incredibly strong opportunity for sales growth for vehicle manufacturers for the coming years.

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Source: Polk Research

Putting off Buying a Car

The current year rate represents an increase of nearly 1.5 vehicle years of age over the last decade. A trend of steady increases has been in place since 2002, which accelerated noticeably since the financial crisis in 2008.

The increasing average age of vehicles is in part due to the improving quality of vehicles, and in part due to the high unemployment, which without a doubt caused many jobless drivers to put off purchasing new cars.

The Time for the Vehicle Age Trend to Change is at Hand

The single largest rationale for the growth in sales of new vehicles continues to be the economic recovery in the U.S. While information signals have been mixed and jumped around significantly, it is very clear that the U.S. is recovering from the financial crisis, and there are fewer and fewer people predicting a double-dip recession.

Unemployment rates finally clawed their way back below 8 percent and are now at 7.4% as of the month of July 2013.

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Source

Critics of the unemployment rate will be quick to point out a disparity between the recovery in unemployment and household median income, which has only stabilized since the plummet that followed the crisis. Many of the new job creation from monthly reports continue to be either part-time jobs (less than 35 hours a week), low-paying or both. Of the non-farm payrolls added since the beginning of the year, 77% of these jobs have been part time work and 61% have been in low-paying industries.

Though the recovery in jobs has been disappointing, employed Americans continue to fare better, with a continuous growth in average weekly earnings. So far this growth has barely matched inflation, but the continued positive trend throughout the crisis is reassuring.

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Source

The Housing Market continues to make impressive recoveries, posting continuous increases in sales volume and prices throughout the first part of 2013. Both new and existing homes have been able to post robust recoveries throughout the year, with 2013 running up to be the best year since the start of the collapse.

New Vehicle Sales

Since 2008, sales of new vehicles have steadily recovered and are well on their way to returning to the pre-2008 levels.

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The seasonally adjusted annual rate as of July 2013 stands at 15.81 M units of light vehicles, a rate not seen since December 2007. 2012 marked the third consecutive year of a 10% or more increase in new vehicle sales, and as of July, the current year will be just shy of this with another 8.5% in growth.

Sales Recovery VS Vehicle Age

Yet, despite this strong sales recovery, vehicle age continues to grow. In 2012, despite 13.34 M in light duty vehicle sales across the U.S, the average age of vehicles grew from 11.2 at the start of 2012 to 11.4 at the start of 2013.

This signals that despite the addition of more and more new vehicles, their predecessors are still on the road and staying on the road for longer, not properly replacing the existing fleet of vehicles.

The inference from this is staggering. Though a portion of this could be blamed on the longer life of newer cars, and the families with multiple vehicles keeping their older cars as "beaters," it is apparent that the annual sales volume of new vehicles has a significant amount of room to grow as the economy recovers.

More Vehicles on the Road

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Source

The total sales of 12.73M vehicles in 2011 represented only 5.4% of the total vehicles on the road. This rate is not sufficient to replace the existing fleet as demonstrated by the significant increase in the average age over that same period. Total vehicle statistics for 2012 are not yet available, however the implication would most likely be the same, the U.S. is not replacing its vehicles fast enough, and the proof of this is the continuous increase in vehicle age despite record new vehicle sales.

New Cars

Total Cars

Percentage

2005

15.89

231.90

6.85%

2006

15.11

234.52

6.44%

2007

15.28

235.68

6.48%

2008

13.9

236.45

5.88%

2009

9.23

234.47

3.94%

2010

11.11

230.44

4.82%

2011

12.73

233.84

5.44%

Therefore, we can expect the rate of new vehicle additions to have to increase in the near term as there will have to be a change in the trend of ageing in the American fleet of vehicles. The new vehicle purchase rates seen in 2005, 2006 and 2007 were much higher, but in each of these years the average age of vehicles continued to climb by 0.1 years of vehicle age per year. This means that even at the higher rate, the U.S. was not fully replacing its fleet of vehicles.

And yet, returning to these levels to slow down the current rate of ageing leaves between 1-1.4 % of total vehicles of room for sales growth. Should we translate this into growth over current sales, we can project at the conservative end between 18-26% in sales volume growth over the coming period.

The Big Three Companies

The three main players we will be discussing in this article are General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) and Toyota Motor Company (NYSE:TM). Respectively, they own the following market shares as of July 2013

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Source

General Motors Corp.

GM reported a Q2 2013 profit of 1.2 B on sales of $39.1 B. This profit was $300 M less than the prior year, primarily due to a higher tax charge of $500 M. GM's gross automobile margin was of 12% and the net profit margin came in at 3.3%.

GM's sales for the second quarter were $39.1 B, which represents an increase of $1.5 B on the prior year. Vehicles sold rose slightly to 1.6 M. GM's market share in cars increased sharply to 6.7% from the prior year's 6.2. This was partially offset by a decrease in the light trucks share from 11.3 to 11.1% for a total U.S. market share of 17.8%, up from 17.4% in the prior year.

Analysts set a target price of $43.95 (upside of 22%) and the average recommendation is Buy on GM shares. The shares currently trade at a P/E ratio of 12.9 with no dividend.

Ford Motor Company

Ford reported a Q2 2013 profit of 1.23 B on sales of $38 B. This profit was significantly lower than the prior three quarters, which all were in the range of $1.6-1.63 B. Ford's automotive operating margin was of 6.4% and the net profit margin came in at 3%. Ford's margins continue to be hurt by its unprofitable European operations, higher costs, and payments to the U.S. Salary Retiree Voluntary Lump Sum Payout Program.

Ford's sales for the second quarter were $38.1 B, which represents an increase of $4.8 B on the prior year. Vehicles sold rose 231 K units to 1.7 M. Ford's market share in cars declined to 4.9% from the prior year's 5.4. This was partially offset by an increase in the light trucks share from 9.7 to 9.8% for a total U.S. market share of 14.7%, down from 15% in the prior year.

Analysts set a target price of $18.90 (upside of 11%) and the average recommendation is Hold on Ford shares. The shares currently trade at a P/E ratio of 11.21 with a dividend yield of 2.35%.

Toyota Motor Company

Though much less reliant on the U.S. market than the previous two companies, Toyota still deserves a significant mention here as it is one of the key players. Toyota's market share rose in July of 2013, from the prior year's 14.3 to 14.7%. The market share in cars increased from 7.8 to 8.3% while the share in light trucks declined from 6.5 to 6.4%.

Analysts set a target price of $154.16 (upside of 19%) and the average recommendation is Buy on Toyota shares. The shares currently trade at a P/E ratio of 16.37 with a dividend yield of 1.54%.

Conclusion

2012 sales rates for light vehicles brought us back near the levels of sales last seen before the financial crisis, and the data so far in 2013 points to an even better year. Yet despite this, the average age of vehicles has climbed and reached a new record of 11.4 years.

Although a portion of this aging could be caused by longer life of more advanced vehicles, it is more likely that this age results from consumers' reluctance to purchase new cars when facing high unemployment and an uncertain economic future. Now, during the recovery stages of the American economy, we can expect a significant boost in the sales volumes of new vehicles as confident consumers need to replace their aging fleets.

Sales volumes in new vehicles could climb by as much as 18-24% just to slow the rate of aging of vehicles to that before the recession. This rate could be made even higher by the fact that we have reached an all-time record in vehicle age, and many clunkers will soon have to be replaced.

I strongly recommend investors do some research into the three major automotive players outlined above and consider a long position in any of them. The opportunity created by this upcoming sales growth, coupled with the current strong data so far this year could result in strong results in the coming years.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GM, TM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Great News For Car Makers - U.S. Vehicles Are Getting Older And Older