[Originally published on April 30, 2014.]
Detroit built its reputation as America's Motor City on the strength of its resident automakers, Chrysler (Pending:CGC), Ford (NYSE:F) and General Motors (NYSE:GM). When two of the three filed for bankruptcy back in 2009, along with the city itself last year, it was difficult to see how they would ever turn it around. But at the Detroit Auto Show earlier this year, one of the most important events in the motoring calendar, the Big Three showed just how far they have come since the 'Funeral Show' of 2009. Here is why experts are saying the Big Three are back - and why the companies represent an opportunity for investors.
Although Ford narrowly avoided bankruptcy five years ago, it had to take out huge private loans to stay afloat. Today, Ford has paid off its debts, rebuilt its balance sheet and last year boasted an annual sales increase of 11.7%, the highest of the Big Three.
The strength of Ford lies in the F-series, America's best-selling pick-up for the past 37 years and the best-selling vehicle, period, for 32. So far, Ford has built over 30 million of them. At the 2014 Auto Show, Ford unveiled the 2015 F150, becoming the first company to build an all-aluminium pick-up. With a military-grade aluminium cab and body, the vehicle is 300kg lighter than its steel predecessor.
Decreased weight means a vastly improved fuel economy, something businesses and families are keen to tap into. It is impossible to understate the significance of this feat of engineering: Paul Ingrassia of Reuters describes the F15 as a 'revolution' and a 'new frontier' in fuel economy, while UK motoring programme Top Gear called it 'the most important thing at the Detroit 2014 motor show;' Auto News quotes The Car Lab as having said it 're-writes the competitive standards for the full-size truck market.'
Fuel economy will become even more important over the next decade: by 2025, the US will require a fleetwide average of 54.5 miles per gallon, and there will be similar rules in the Middle East, where F-series sales have doubled in the past year. Ford is the company best-positioned to meet the growing need for economical vehicles.
Since being bailed out by the US government, General Motors has a 'new lease of life,' reporting an annual sales increase of 8.8% last year.
General Motors' Chevrolet brand won American Auto Writers' 2014 prize for both the best car (Corvette Stingray) and best truck (Silverado 1500), and seems determined to hold onto the title with the new Corvette Z06, boasting 625bhp and a supercharged V8 engine - one of Auto Express' Best Cars at Detroit Motor Show 2014 and one of Motor Trend's 'most significant performance car reveals of the 2014 Detroit auto show.'
While maintaining its reputation as an aspirational sports car brand, Chevrolet is also positioning itself as a forward-thinking company. According to RealTimeInvestment.com:
[General Motors] has made the biggest push of any to create a 'smart' vehicle, capable of connecting with phone apps and other home devices. 2015 Chevys will come with an app store, as GM tries to foster a technology ecosystem around its cars.
General Motors' warm reception at the Detroit Auto Show 2014 is a sign that the company is back to full strength, while entering the in-car technology niche is a smart move that will ensure the company remains ahead of the curve.
As I wrote in March, the ignition switch tragedy has caused the GM share price to dip, but based on previous experience, manufacturer recalls do not typically affect a stock's long-term performance, and within the next couple of years we can expect to see as much as 50% upside, according to JP Morgan Chase analyst Ryan Brinkman.
When Chrysler declared bankruptcy, the US government sold it to Fiat (FIATY) for next to nothing - an unpopular move that dealt a crushing blow to the company's first-lien creditors, resulting in jobs lost and dealerships closed across the US.
But in January, Fiat bought the remaining 41.5% of Chrysler Group LLC that they did not already own, completing the merger and charting a new course for the company with CEO Sergio Marchionne at the helm. Things are already looking up: last year, Chrysler reported an annual sales increase of 9.3%. Forbes is calling Chrysler 'one of the cheapest major automakers on the planet.'
At the Detroit Auto Show 2014, the company unveiled the well-received Chrysler 200, a medium-sized sedan to rival Honda (NYSE:HMC) and Toyota (NYSE:TM). However, the real opportunity lies in the combined power of Fiat and Chrysler. In a situation where the whole is greater than the sum of the parts, the Fiat/Chrysler entity benefits from both American and European income streams. Right now, Chrysler is propping up Fiat, with US sales of Jeeps, Rams and Dodges compensating for the weak European car market. But when the European economy improves, as it is expected to over the next two years, the Fiat/Chrysler entity is poised to profit. By the end of the year, Fiat Chrysler Automobiles will be the world's seventh-largest automaker, capable of producing 7 million cars per year. The new company will be listed on the NYSE by October.
After a difficult five years, Detroit's Big Three are back building award-winning vehicles, innovating and expanding. The recovery of these companies provides an exciting opportunity for investors and will help Detroit to reclaim its reputation as America's Motor City.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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