AutoNation (AN), the nation's largest auto dealer, announced today that its unit sales for the month of May were up 45% compared to a year ago. Domestic sales were up 21%, while import sales, lapping an easy comparison after the Japanese supply chain disruption last year, were up 78%. The sales improvements reinforce what we saw last week with most auto retailers reporting robust sales growth. It also underscores the strength in retail auto sales, which are more profitable than fleet sales, and ultimately bodes well for the profitability of automakers. We think AutoNation's shares are about fairly valued, but we do think the company's fundamentals look rather sound.
Furthermore, the Chicago Fed survey forecasts total industry sales of 14.5 million units during 2012, up significantly from 12.7 million units in 2011. The survey also forecasts sales of around 15 million in 2013, which we think may be conservative if the economy heals and job growth accelerates.
We think the strength in sales growth underscores the pent-up demand that we identified as one of the key drivers behind our Ford (F) thesis. Ford remains a high conviction holding in our Best Ideas portfolio (please view links on our left sidebar). We recently had some worries that the elimination of the Ford Ranger pickup in the U.S. would lead to Chevrolet (GM) stealing some share in the small pickup market. However, the excellent increase in the F-Series' fuel efficiency has simply led consumers to trade up rather than swap into the competitors' options.
Ford also announced that it is exploring "indigenous" branding in China. Ford was a bit late in entering China relative to General Motors and Volkswagen, and thus far has struggled to gain significant share. The company already has small stakes in a few Chinese automakers, but creating its own new brands would allow the firm to control the technology and production to a greater degree. While we think it's important for Ford to establish both the Ford and Lincoln brands in China, we think it could be wise for the company to introduce a new brand to cater to the low end of the market. This could spare the Ford and Lincoln names from brand deterioration, and it could lead to a more prestigious positioning in the Chinese market where brands have substantial value.
With shares presenting investors with a 2% annual dividend yield and excellent growth prospects, we think Ford remains very interesting at current levels. However, it does seem that as long as problems persist in Europe, the market may not fully appreciate the firm's earning power and improved business model. Nonetheless, we're holding strong with our position.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.