Investing in auto stocks has not been easy for the past few months. Even though car sales have been solid in the United States, other factors have been driving many stocks in this sector lower. Much of what seems to be causing declines is the slowing economy in China, and the even more serious European debt crisis, which is quickly sending some countries into recession, or maybe worse.
April car sales in the United States were just reported, and it shows that sales in this country are also starting to slow down. Ford (F) sales were down about 5%, and General Motors (GM) sales were down about 8.2%. This could be due to a combination of factors, which point to what might be a rapidly developing economic "stall" in the United States. For example, job growth came in weaker than expected for March, as did GDP data. The poor performance of the auto stocks could be an early signal to the markets that the economy is headed lower in the coming months. The economic boost from the huge stimulus spending is just about to come to an end, (probably not coincidentally just before a major election) and what is coming next is the bill for all that spending. This means higher taxes are likely in 2013, and that could cause the economy to weaken. There are predictions that taxpayers will be hit with about $494 billion in new taxes on January 1, 2013, due to the expiration of certain tax cuts and the addition of several new taxes to pay for "Obamacare."
Another big factor that could push the U.S. economy lower is reduced government spending, which will come into focus when automatic budget cuts potentially come into play when the debt ceiling debate is renewed later this year. Because auto sales are very sensitive to the economy, investors in this sector need to pay attention to looming economic challenges. All investors should be wary when auto stocks are in a downtrend, as it could signal tough times ahead. While many major issues loom for the U.S. and world economy, the valuations of many auto stocks are very compelling. The sector trades at a discount to the average stock in the market, and if the economic challenges are properly managed, it could be an ideal time to be accumulating shares in select companies. While the markets have been widely bearish on auto stocks, analysts see opportunities for gains of about 50% with certain companies. Based on the low valuations as well as the economic risks, it probably makes sense to cautiously put some money to work in this sector with the understanding that these stocks may not have bottomed out yet. That is why investors should consider taking a partial position and keep some cash available, in case these stocks go even lower later this year. Here are a few stocks that analysts expect to see large gains:
Ford Motor Company is manufacturing and marketing cars under the Ford, Lincoln and Mercury brands. The company has made significant progress, which includes paying down debt, and having its credit rating upgraded. This progress has allowed the company to initiate an annual dividend of 20 cents per share, which provides a yield of about 1.6%. The company is making fuel efficient cars and designs that are selling well, thanks to high quality ratings and competitive prices. An all new and fuel-efficient Ford Escape will be launched in coming weeks, and other new designs are expected to boost sales in the future. It seems that Ford management is doing so many things right, but the market has not rewarded the company for that due to macro issues in the global economy. However, Ford seems to be on the right path and eventually this should reward investors. Just weeks ago, an analyst at Standpoint Research upgraded the stock from hold to buy and set a $17 price target. With the stock trading near $11 per share, this could provide investors with gains of about 50%.
Here are some key points for F:
Current share price: $12.51
The 52-week range is $9.05 to $16.18
Earnings estimates for 2012: $1.47 per share
Earnings estimates for 2013: $1.70 per share
Annual dividend: 20 cents per share, which yields 1.6%
General Motors, Inc. has also made solid progress, but it received bailout funds from the U.S. government, and that is why many shares are now held by the Treasury Department. Those shares are expected to be sold eventually and until that sale is complete, there is likely to be an overhang on this stock. General Motors is also making more fuel-efficient cars and trucks and that has helped to boost sales. It is a major player in China and other emerging market countries and this could boost future growth. The company recently raised sales estimates for 2012, from a range of 13.5-14 million to 14-14.5 million cars, which would be the highest level seen in years. An analyst at RBC Capital Markets recently reiterated an outperform rating and set a $34 price target. With GM shares trading near $23 per share, this could provide investors with gains of about 50%.
Here are some key points for GM:
Current share price: $23.31
The 52-week range is $19.00 to $33.47
Earnings estimates for 2012: $3.65 per share
Earnings estimates for 2013: $4.64 per share
Annual dividend: None
Tenneco, Inc. (TEN) designs, manufactures and markets a variety of automotive products including catalytic converters, suspension parts, exhaust systems and more. It sells under popular brand names such as Monroe, Rancho, Kinetic, DynoMax, Thrush and others. The company recently reported earnings, which came in lower than expected. Tenneco earned $30 million, or 49 cents per share, in the first quarter of 2012. Estimates had been for about 73 cents per share, although the results look better when you consider that refinancing costs were partially responsible for the lower profits. An analyst at Barclays Capital reiterated an overweight rating earlier this year, and set a $51 price target. Tenneco shares are trading near $32 per share, so this could provide investors with gains of about 50%.
Here are some key points for TEN:
Current share price: $32.56
The 52-week range is $22.47 to $46.80
Earnings estimates for 2012: $3.44 per share
Earnings estimates for 2013: $4.36 per share
Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.