Auto Sector Driving in Different Directions

 |  Includes: F, GPI
by: Wall Street Strategies

By David Silver

It was a tale of two stories for the auto industry today, as Ford (NYSE:F) reported its best first quarter since 1998 and indicated there was a limited impact (12,000 to 14,000 units) from the disaster in Japan. However, the two largest automotive retailers in the country (the largest consortium of dealerships) -- AutoNation (NYSE:AN) and Group 1 Automotive (NYSE:GPI) -- reported strong earnings for the current quarter but both lowered guidance for the remainder of the year, as the earthquake and tsunami is hindering production for many models.

Ford is looking to raise prices as a result of higher commodity prices, and dealerships are torn between trying to get consumers on lots (higher incentives) and not having enough supply (enough models with enough options) to satisfy the demand.

Approximately 35% of GPI's sales are from the Toyota (NYSE:TM) family, while Nissan (OTCPK:NSANF) accounts for 14% and Honda (NYSE:HMC) for almost 13% -- so more than 50% of GPI's sales come from companies that are having plenty of problems bouncing back from the disaster.

Ford indicated that its problems are restricted to primarily the Asia Pacific region, with approximately 12,000 to 14,000 units of production lost as a result of parts shortages. Ford has a chance to continue to take market share, as it has an extensive product line-up and is able to capitalize on fuel prices no matter which direction it is moving.

The auto industry as a whole (dealers included) is not prepared for fuel above $4.00, let alone above $5.00. As of this morning, eight states have gasoline above $4.00 per gallon, and there are a few more within striking distance of the pivotal number. Back in 2008, $4.00 for a gallon of gasoline was the breaking point for the economy and sent it spiraling into the Great Recession.

Can the industry hold on this time around? I think the industry is better positioned now than it was back in 2008, as most automakers (save for Chrysler (DCX)) have expanded their smaller, more fuel-efficient vehicle line-ups. However, Ford is the best positioned of the North American automakers with vehicles to capitalize on higher fuel prices (Fiesta, Fusion, Edge), or when prices (hopefully) come down (F-150, Explorer).

That strength doesn't really help GPI; Ford only accounted for 7% of its sales, which is actually down from the 8% it registered during the first quarter of 2010.