Is The European Auto Market Coming Back To Life?

 |  Includes: F, GM, NOK, SIRI, TM, TSLA, VLKAY
by: Jacob Steinberg

In the recent weeks, there have been some developments signaling that the European car market might be coming back to life after a long and deep recession. Due to high unemployment rates, lack of credit and high gasoline costs, the European car market has been on its death bed for a while, and almost every car company operating in the continent lost money. Now, the tide might be starting to turn.

Between 2007 and 2013, the European car market's volume fell from 17 million to 13.5 million. As Europe's population grew by 5%, the continent's car volume fell by 20% during this period. Companies like Ford (NYSE:F) and GM (NYSE:GM) lost billions of dollars in the continent (in fact, GM lost more than $17 billion between 1999 and 2012 in Europe) during the seemingly never-ending recession but things are starting to change.

Speaking at the Frankfurt Motor Show, Renault's CEO Carlos Ghosn practically said that he saw the bottom in European car market; however, he also admitted that the recovery of the market would be a long and painful road. This is consistent with what Ford Europe's boss Stephen Odell said a couple weeks ago as he saw European car market to take another 5-6 years to recover.

Car companies in the continent are offering cheaper cars that are more fuel efficient in order to offset the high taxes imposed on car and gasoline sales by the European governments. Interestingly enough, several car companies, including Tesla (NASDAQ:TSLA), are introducing new electric cars in Europe. I expect tense competition in Europe for a tiny but growing electric car market. Volkswagen (OTCPK:VLKAY), Daimler, and BMW are some of the major players that are introducing electric cars in the continent. Interestingly enough, other car companies like Ford and GM will continue to offer hybrid options that are becoming more fuel-efficient by the year. If hybrid and regular gasoline cars keep getting more efficient, this might reduce the need for electric cars over time.

Tesla plans on opening new stores in many large European cities like Amsterdam, Paris and London, and it expects to cover a significant portion of the continent with Supercharger stations in order to maximize the range of its cars. Currently, only 0.2% of the new cars sold in Europe are electric or hybrid cars; however, Tesla's goal is to increase overall usage of electric cars by improving people's awareness of the advantages of these cars. If Tesla is successful in the European market, this might change things for the entire electric car market in the continent. One European country where Tesla got a huge reception is Norway, where the company accounted for 6.1% of all luxury cars sold in September so far. Despite being an oil exporter, Norway has the highest gasoline prices in the world, along with Turkey, mostly due to the gasoline sales tax that exceeds 200%. This is why I'm not surprised that Tesla's Model S received good reception in Norway.

Some car companies like GM and Ford are attempting to gain market share by adding small SUVs to their product mix. Compact SUVs like Ford's Escape are gaining a lot of attention from the consumers as they carry the best of the two worlds: feel and comfort of an SUV and fuel efficiency and maneuverability of a sedan.

Meanwhile, Toyota (NYSE:TM) is launching paid apps such as navigation and radio in its cars in Europe. Those who are interested in taking advantage of this service will be charged an annual fee of $60, which comes down to $5 per month. Nokia's (NYSE:NOK) mapping business HERE will be involved with creating and maintaining many of these apps. We don't know how much of the money will go to Nokia but this is an interesting concept and this could compete with Sirius' (NASDAQ:SIRI) business model. If the concept proves profitable for Toyota and Nokia, we can see this being launched in other car makers as well. Meanwhile, Toyota will offer a different set of apps in the U.S. but it will not charge the users for those apps for the time being. Who knows, maybe Toyota's marketing research indicated that Europeans would be more likely to pay for those apps than Americans.

One of the most successful car companies in Europe is Volkswagen. This is, perhaps, the only company that held onto most of its volume during the recession. Volkswagen is highly profitable as the company generated $28 billion in net profit last year. While most of Volkswagen's growth and profits came from outside of Europe, the company performed very strongly in Europe as well. The investors kept discounting the company due to worries regarding the European recession, but the company kept proving people wrong. Currently, Volkswagen trades for a trailing P/E ratio of 4 and forward P/E ratio of 3 and it continues to be the cheapest public company in the world with a market cap of $100 billion and higher. In fact, Volkswagen's cash and cash equivalents total $46 billion, which would reduce the company's P/E ratio to 2 if excluded. Volkswagen is as cheap as free. The company's American shares have low volume and they don't have options, keeping many Americans from investing in it. Along with Ford, Volkswagen is the top company to benefit from a European car market recovery.

In conclusion, the European car market will see a lot of exciting developments in the next few years. There will be recovery, introduction of new products such as smaller cars and compact SUVs, in addition to the "electric car revolution" that Tesla fans expect to come.

Disclosure: I am long F, OTCPK:VLKAY. 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.