Growing Automobile Industry
Are you thinking of buying a new car in 2012? Chances are there's a substantially greater amount of people that are responding YES. In this article I'll outline the direction the automobile industry is going in 2012, and the companies I think are positioned to see large shareholder gains. The magical number being tossed around for sales forecasts in the United States next year is on the high side of 13 - 14 million units. This would represent another increase in the automobile industry from 12.8 million last year, 11.6 million in 2010, and 10.4 million in 2009.
The industry is improving and is showing all the signs of one, which will continue to grow. We will most likely never see the growth that preceded the global recession where over 16 million units a year were being sold, but there's certainly room for growth within the industry.
Effects of the Recession
One of the biggest driving forces behind the automobile growth in 2012 is the expected demand due to lower sales in previous years. People are now holding on to their cars for a longer period of time, trying to squeeze out as many miles as they can. Consequently, the average age of a vehicle in North America is 11 years old. The cars on the road right now have never been older.
This longer gap is now finally catching up with the automobile market as people who would have purchased a car a few years ago, are now looking at buying. Furthermore, there's a large population of people that generally look towards 3 - 4 year old used vehicles that will be pushed to by new automobiles. There will be a large lack of supply of "new used" cars for two reasons.
1. People who bought cars 3 or 4 years ago are now more likely to hold onto them.
2. In 2008 and 2009 automobile producers drastically reduced their production due to the recession.
The lack of supply will lead to more people buying new cars. The sales may never rise to the booming industry it was before the recession, but the producers are now substantially more efficient. The US automobile producers have reduced their breakeven point by more than 1 million units, allowing them to achieve much higher profits per unit sold. This has evened the playing field with the Asian competition, and in some cases even generated a cost advantage.
As one can presume, I believe that investing in the automobile industry is a smart decision for 2012. This industry has done well in the past as the United States recovers from recessions, as corroborated by their growth from the recession in the 1980s. As previously mentioned, this is simply sales catching up from the recession years where people neglected to purchase new cars. Cars break down. Old cars cost a ton of time, money, and energy to maintain.
A period of low sales will always produce a spike unless people fundamentally change the way in which they travel.
Don't expect that to happen anytime soon. Almost every city in North America was created or grown on foundation of the car being the primary source of transportation.
The same story can be said for the rest of the world in terms of growth in the auto industry, with the exception of Europe. Although the impact of Europe will certainly be felt, the expected growth in the rest of the world should more than make up for it. Automotive information provider R. L. Polk & Co. is expecting to see worldwide sales grow by 6.7% in 2012. They anticipate the main factor behind the growth of the industry will be China, which they predict will grow 16% to 17.9 million units.
If you feel the logic of what's been presented to you thus far, but are not convinced by the proceeding recommendations, invest in NASDAQ Global Auto ETF (VROM). This will rise and fall with the automobile industry.
Look to the Red, White, and Blue
I believe this will be a great year for the red-blooded American cars which helped fuel the economy for decades. They've gone through a period of struggle. Overpriced, gas guzzling, inefficient cars became the staple of the Detroit Three from the beginning of the century leading up to the recession. Many people will argue that their pre-bailout reputation will haunt them for many years to come. I tend to disagree.
Effect of Consumers Due Diligence
There is a substantial difference in the amount of research and effort one puts into buying a car compared to getting a new pair of jeans. Clothing is based heavily on reputation. True Religions are today's porches. These jeans have been one of the most expensive and flashy brands for years. Levi's are today's Toyotas; fairly priced, not very fancy and they get the job done. Rock & Republic would be the GM of the jeans world. Once one of the most popular jeans on the market, but became lackluster in its production leading to a fall in brand image. It eventually filed for Chapter 11 and are now sold at Wal-Mart (NYSE:WMT) and Costco (NASDAQ:COST). When someone goes to buy a pair of jeans they know what they're getting themselves into, literally, beforehand.
When people purchase a new car they research it, test drive various cars, and ask around about the model. Their preconceived notions on the quality of vehicles are often compromised after doing proper due diligence. Reputation is still very much a factor, but not the motivation behind most purchases. For this reason I expect big things coming out of Detroit this year.
Never count out the patriotism of Americans supporting the Stars and Stripes when making a purchase.
Ford has become one of the darling children of Seeking Alpha, and for good reason. This is personally my favorite of the automobile stocks for the upcoming year. Its turnaround is simply a feel good story, one which I want to be a part of. The Model T was a defining force in America and even today the family holds a substantial piece of the company.
Furthermore, while its neighbors down the street were taking large bailouts, Ford was able make it through the recession without one (although it did receive some friendly government loans). For nostalgic reasons alone I want to be a part of this company, the expected gains are just an added bonus. Perhaps it's the other way around.
Ford is not the company it used to be. It has gone through a complete transformation towards becoming far more efficient in its production, while producing higher quality vehicles. As great as it was to have Jay-Z informing customers about the difference between its Range Rover 4.0 and 4.6 in "Imaginary Player," getting rid of the Jaguar Land Rover group started its push towards efficiency. It has reduced the costs of production through trimming the fat and is now producing some of its best products in years. The sale of these products is now returning higher profits as well; it's beating the net margin of the industry by 1.7% with current net margins at 6.2%.
Take a look at the new 2013 Ford Fusion. That right there shows the new sleek image that Ford will be producing. Nice curves and finely drawn lines accentuate the attractive design which had consumers foaming at the mouth at the recent Detroit Auto Show. The horse under the hood is no slouch either. The engine has direct fuel injection and turbochargers, with a hybrid version just around the corner.
The first number that should jump out at you when looking into investing in Ford is the P/E ratio. With a P/E ratio of only 7.53 this company looks very attractive. This of course should not be the sole basis of going long in Ford (just ask anyone who invested in RIM last year) but it certainly shows the potential for gains (just ask anyone investing in RIM right now). Ford's EPS is outperforming that of both Toyota (NYSE:TM) and Honda (NYSE:HMC) at 1.67 and it has recently reinstated its dividend due to the healthy cash position its climbed back into.
This reinstatement of the dividend is hugely important. Put yourself in Mr. Mulally's (President, CEO) shoes for a second here. You've been fighting and scraping everyday to bring this company back to respectability. Would you even CONSIDER declaring a dividend unless you were completely confident in the company's ability to pay off debt? I have faith in the competence of the controllers of Ford pertaining to the reinstatement of the dividend. I'm taking this as a signal that Ford is recovering well financially.
General Motors (NYSE:GM)
If Ford is the Darling Child of the Seeking Alpha community, GM would be the ADHD kid with lots of potential, pending the Ritalin starts working. I believe the Ritalin, aka, CEO Dan Akerson, is making this kid more productive with each passing hour.
Dan Akerson, a wealthy managing director at Carlyle Group was brought into GM to represent the 61% stake which the US Treasury had taken over. This graduate of the London School of Economics had no prior experience in the automobile industry but has since proved to be a savvy leader. He moved to Detroit over 18 months ago and has been overseeing the company ever since.
Gotta love a wealthy asset manager living in Washington, D.C. willing to move to Detroit for one of the lowest CEO salaries in America.
He's implemented a new culture at GM that encourages efficiency. This has allowed it to regain substantial market share. GM is currently operating at a profit margin of 6%, which is decent. According to the CFO, Daniel Ammann, GM expects to raise this margin up to 10% in the next few years. This translates to a net profit ratio of 4.7%, slightly higher than the industry average. In terms of "cheapness," one can assume GM is priced more cheaply than Ford, with a P/E ratio of 5.55 and EPS of 4.57.
Some analysts have pointed towards the lack of dividend from GM as a sign that it's not a healthy company. This is a reasonable conclusion due to the culture of dividends in the automobile industry. However, one must assume that GM will be as fiscally conservative as possible due to the bailout. As a result, it makes sense that every dollar earned is going back into the company or increasing its cash reserves. Don't expect a dividend until it's a complete no-brainer.
GM's vehicles produce the worst mileage on the planet right? This stigma, among others related to GM, will be proven otherwise when customers start doing their due diligence in buying a new vehicle. The new Chevrolet compact Cruze is about to be released in a diesel-powered edition. This version is rumored to deliver better highway mileage than the Toyota Prius hybrid. Sales of diesel powered vehicles went up 27% last year, signaling consumer confidence in diesel technology.
I don't like Toyota as a buy right now. I think more time needs to pass before we can see its full rebound from the earthquake in Japan. Unfortunate natural disasters attacked its supply chain and it will be interesting to see how it can bounce back from this. Initially it looks as though Toyota is back to normal production levels and ready to take back more of the US market share. At a P/E ratio of 51.62 I'm hesitant to jump into this stock. This number is inflated by the effect of an unlucky year, and will likely turn to a normal number around 15-20 in 2013. Its struggled in recent years due to news breaking recalls, reduced sales, and the aforementioned natural disaster.
Furthermore, I'm not sold on the 2013 Land Cruiser, Prius, or Aygo. None of these new products catch my eye as ones which will increase its position in the market substantially. The competitive advantage Toyota once had from its production line is no longer the force it once was. The competition has caught up in its efficiency and has leveled the playing field. Toyota is a world class organization, one which helped redefine the way automobiles are made, but I feel there are better options available.
Of the three companies affected by natural disasters, Nissan has been the least impacted. Honda and Toyota appeared to have greater disruption on their production lines while Nissan was able to recover relatively quickly from the flooding in Thailand. It produces quality cars with good mileage. The new Altima is a sleek car which comes reasonably priced. The Rogue has been enjoying success in North America for the past few years due to its drivability, mileage, and cheap price tag.
Its new battery electric vehicle, the Leaf, looks poised to sell a decent amount on the market. I also believe that the current CEO, Brazilian-Lebanese-French businessman Carlos Ghosn, has made important decisions which have fueled the company to passing Honda as the second largest automobile producer in Japan. Unfortunately, I'm not very well versed in OTC stocks so let this be the starting point in any further investigation on Nissan.
Risk Averse - NASDAQ Global Auto ETF
Some Risk - Ford
Risky - General Motors
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in F over the next 72 hours.