Why Not Buy Some Auto Stocks?

Apr. 4.12 | About: Ford Motor (F)

Ho-hum. Another month, another sales gain.

What's it going to take to get GM and Ford (F) out of single-digit PE territory?

If car sales continue the current pace through the year they would total 14.4 million, and most analysts think they can.

The record years of the mid-2000s, when the industry was selling 17 million vehicles per year, are receding into the past, and with that the nation's car fleet continues to age. My family's own cars are now age 7 and 10, and while both are running great I could see myself in a car dealership again fairly soon.

That might mean something like the Chevrolet Sonic, the Buick Verano, or the Ford Focus. All three did particularly well in the latest report.

But what investors want to know is whether this recovery has legs. Yes, it has legs:

  • Consumers can afford higher prices as they're getting higher mileage, even on big pick-ups.

  • Car makers are benefiting from labor peace and lower input prices.

  • Buyers may be buying smaller, and fewer cars, but they want those they do buy to have luxury interiors and the latest technology. That means margins.

  • Low interest rates mean the actual cost of your car loan has barely changed from the last time you were in the dealership.

Yet every time we get another good report, investors are buying the rumor and selling the news. GM dropped $1.22/share after the latest numbers came out. Ford lost about 30 cents. Both are down about 20% in price from a year ago.

This can lead to some insane PE multiples. GM's is under 6. Ford's is under 3. And Ford has brought back its dividend. Sure, it's just 5 cents per share, but at its current price that's still a yield of 1.58%.

There's no reason to believe these trends are about to change any time soon. High gas prices actually benefit the sector by adding savings to a buyer's calculation. Lower prices for the energy car makers consume most of - electricity and natural gas - mean costs are under control.

The only cloud on the horizon remains the competition. Nissan beat Ford for New York's latest taxi contract. Toyota (TM) is increasing its sales smartly, although no faster than America's big two.

The difference between the behavior of the two company's stock smells like opportunity from here. Investors have bid Toyota up to a PE of 86. By contrast, shares in Ford and GM are priced based on declining sales. Declining sales are not happening.

Look, if Bill Gates is buying auto dealerships, specifically AutoNation (AN) don't you think getting into the opportunity should be your job one?

Disclosure: I am long F.