Why Auto Stocks Are an Easy Short 41 comments
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As this economy continues to sputter, the US auto companies, including Ford (F) and General Motors (GM), will likely to decline. Here’s why:
First of all, the management at both of these companies has been very disappointing. Look at Ford for example. In an attempt to restructure the company, Ford brought in the well-respected Alan Mulally as the new CEO. Mulally has an excellent track record as a turn around artist. His results with Boeing prove that. However, since Mulally joined Ford, he has little to show for his efforts. In fact, his first major move at CEO was to get rid of the ageing Taurus brand (rightly so) and replace it with the Ford Five Hundred. Not six months later, he decided it would be a good idea to trash the Ford Five Hundred, and bring back... the Taurus??
Then there’s General Motors Corp Vice Chairman, Bob Lutz, who just recently referred to global warming as a “total crock of s---.” He may be right, but considering the role he holds at General Motors, he should confine such comments to his personal life. As Vice Chairman of GM, Bob Lutz has a responsibility to his company, as well as its shareholders, to lead General Motors forward in a respectable and profitable manner, regardless of his own personal views.
On another note, I have yet to see any true leadership from either of these companies when it comes to building cars for a 21st century with sky high oil prices. GM and Ford have failed to evolve in a dynamic new world where energy is considered to be a precious commodity. The only ads on television anymore are for trucks proclaiming, “Look at how big my V-8 engine is,” or “Check out how big of a boat I can pull with my huge truck.” Even if global warming is still questionable to say the least, it still makes economic sense to build fuel-efficient cars.
GM’s response to automotive critics was the Chevy Volt, a car that runs on a combination of electricity and a small internal combustion engine to give it a range of 640 miles. Sounds brilliant on paper, but with a scheduled launch date of 2010, it’s simply a case of too little too late.
Even the Japanese are beating us in our own game of “under the hood power.” Take, for example, the all-new Ford Shelby Mustang GT, which generates 319 horsepower from a 4.6-liter V8 engine. Its Japanese counterpart, the Subaru STI, manages to produce 305 horsepower with a flat-4 engine, almost half the size of the one found in the Shelby Mustang. In a straight line, the Subaru does a 0-60 time in 4.8 seconds, 0.4 seconds faster than the Mustang, thus basically defeating the purpose of having a bigger engine in the first place.
So how is this possible? Is it really that difficult to engineer a car to be more efficient? The fact is that Ford has only managed to extract 305 horsepower from a 4.6-liter V8 engine when they could have engineered a V-6 with 319 horsepower and gotten better fuel economy as a result. Here’s some food for thought: BMW managed to extract 333 horsepower from the 3.2-liter engine found in the 2001 M3 and that was designed over seven years ago.
The technology is there, but it has yet to be implemented in American cars. Again, Ford and GM have failed.
If that wasn’t enough, the interiors of these so-called American cars are just as poorly engineered as the engines. Even Ford’s Mullaly stated that Lexus makes “the finest cars in the world.” So if that’s the case, then why doesn’t Ford take a few notes from Lexus and start crafting better interiors instead of continuing to make such poor automobiles? I will give GM some credit, as they have stepped up there interior design as of late, but I wouldn’t be lying if I said that most of the materials found in Ford/GM cars look like something I could pull out of my garage.
Ford and General Motors have simply missed the mark with nearly every automobile they have produced in the past decade (a few exceptions of course). The poor engineering of these cars, coupled with the overall cheap build quality of the cars, makes the majority of them unappealing to Americans, especially in an era where we demand the best of the best. And as this economy comes to a grind, Americans will have less and less to spend on “stuff.” Lest we forget, the purchase of a new automobile is a luxury, not a necessity, whereas just the opposite is true when it comes to purchasing gasoline. With this in mind, I would look for Ford and General Motors to continue to under perform the S&P 500 into the remainder of the year.
Disclosure: none
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This article has 41 comments:
Should their vehicles be more fuel efficient? ABSOLUTELY! Could they be, right now? ABSOLUTELY!
of course, its easy to paint the industry with one broad, negative stroke given all its problems. however, valuations and expectations are quite low as most of the bad news has been priced in. and while we likely haven't yet hit bottom, historically, these stocks trough with the SAAR which we are likely to see in the next 6 months. the stocks then typically outperform as investors anticipate a recovery.
with respect to your comments on mgt, mr mullaly certainly has a lot of work ahead of him, but you can't ignore the fact that he trimmed Ford's losses by $10bn ($12bn in 2006, $2bn in 2007) since he's joined. and you are incorrect in stating that "his first major move at CEO was to get rid of the ageing Taurus brand". Dropping the Taurus was in the corp pipeline before he got there - he had nothing to do with it.
i could go on and on...your bio states that "At only nineteen years of age, Andy has much on the road ahead of him. Currently, in college, he is in pursuit of his stockbroker’s license with a goal of a full time career in the securities industry." As someone who works full time in the securities industry, I can tell you that you do indeed have a very long road ahead of you -- hopefully it includes some education and fact checking. I wish you luck in shorting the sector, but think you may be out of your league.
Mullaly is doing a great job, cutting costs, improved quality, put together a huge funding package that if Ford didn't recieve would have put them out of business.
One additional point, Mullaly did bring back the Taurus name but the previous COE is the one that initially killed it.
The facts are:
1. Buick (GM) is tied with Lexus for long-term reliability, per JD Power (which, incidentally, stopped publishing statistical variance with their quality studies because there is no statistical difference in quality among the major manufacturers).
2. The N. American automotive press corps picked the Saturn Aura (GM) over the Toyota Camry for N. American Car of the Year (2007), and the Chevy Malibu (GM) over the Honda Accord for the same honor this year.
3. The LA Times wrote that the new Cadillac CTS (GM) is better than *anything* produced by Lexus, Infiniti, Acura, BMW, and Mercedes.
4. The Chevy Tahoe 2-mode hybrid (GM), a full-size SUV that gets the same city mileage as a 4-cyl Camry, won the Green Car of the Year award at the recent LA Auto Show.
5. GM offers more 30+ mpg vehicles than any Japanese manufacturer, and your assessment of the game-changing Chevy Volt as 'too little too late' displays your ignorance not only of the vehicle, but of the extraordinarily complex vehicle development process.
Do a little growing up and a lot more research the next time you pretend to give advice.
Also, he talks about pick-up trucks, but fails to mention that Toyota's Tundra base V6 engine gets worse fuel economy that Chevy's V8! I think it is about time this author, and maybe most of us reading these posts, that we start being more critical of the non-American competitors for fairness sake.
Finally kid, product development cycles for cars avergae around three years at best. Unlike your ipod or skateboard, changes to the product do not happen overnight. Like many have said before, check your facts first.
Also, he talks about pick-up trucks, but fails to mention that Toyota's Tundra base V6 engine gets worse fuel economy that Chevy's V8! I think it is about time this author, and maybe most of us reading these posts, that we start being more critical of the non-American competitors for fairness sake.
Finally kid, product development cycles for cars avergae around three years at best. Unlike your ipod or skateboard, changes to the product do not happen overnight. Like many have said before, check your facts first.
The American economy DOES depend on healthy BIG 3. Like it or not Toyota lovers!
I always get a kick out of auto industry analysts who have ALL the answers abouit how to run a car company but likely cant even change their own oil or spark plugs.
But seriously, and in Tony's defense, some posters might attack Tony and mention that being loyal to ones country is unsustainable in today's free market economy and kind of a Luddite philosophy.
However, is that really true when Korea bans American car imports, Japan imposes heavy import taxes on foreigh cars being sold in Japan (plus, the Japanese by nature are very loyoal to Japanese companies over foreigh ones, even in the face of substandard quality), and China requires foreign car makers to partner 50% with Chinese companies. In other words, these countries practice the same thing Tony proposes, so we should as well. Their auto industries are prospering while ours is sinking.
Japanese quality is touted as being far above what it really is. Sometimes I think the U.S. liberal press is in the pocket of the Japanese. Come on guys, we all know that PERCEPTION is everything. When you tell the American public something often enough, they start to believe you. Unfortunately, most people actually believe what they read in our American press.
1. There is no comparison in driving a high power 4 cylinder as compared to a V8. The ride in a 4 cylinder muscle car is pathetic in comparison. You should drive the two and see what I mean.
Is the Suzuru even rear wheel drive? If you haven't driven a rear wheel drive muscle car then .. you should. There is no comparison. FWD absolutely stinks in a powerful car. I've had one and its a joke.
As for the Volt. The car companies operate in a marathon, not a sprint. You cannot put out a game changer in 6 months. It takes several years to devlop an entirely new vehicle. If you just change a few interior things and maybe a little sheet metal, you can get by with the lie of a "new" model in 2 years, but a complete redesign that doens't use the same parts, engine etc takes far longer.
The Volt is a game changer.. watch and see. I would also like ot see more diesels. Europe uses diesels to combat high gas costs.. not hybrid technology that in some cases.. such as the Prius, adds 900 extra drive train parts. Is that efficiency?
GM has to be more careful than Toyota, Toyota has a protected home market and its exports have been subsidized by their government. They can take more risk because they are backed by their country.
GM has more marketshare in 9 out of the top 10 biggets markets worldwide. The only place they don't have more marketshare is in Japan. No outside company has any significant marketshare in Japan. Having a protected market from which to base operations makes a huge difference.
Gm has had high fuel economy vehicles before. HIgher than anything that is on the road now. They didn't sell. We had 1$ gas here while Japan had 4$ gas.. THAT is why they had vehicles with better fuel economy. NOT because they thought ahead or any such nbonsense as that. They built for the markets they were selling in... as does everyone else.
There is no magic at the Japanese aut ocompanies. They have had government support and that is the biggest factor in their success. Take away their currency advantage and I argue they are no better at all than anyone else.
Maybe better stock advice would be to look at how ridiculously cheap GM and F stocks are today! GM's market cap is only about $10B, but annual revenue is close to $200B.
Sure, the US auto market is weak now, but GM and Ford are global companies. GM and Ford are leading growth in new markets around the world like South America, Eastern Europe, Russia, and China. GM's highest annual sales ever was not back in the 50's, but in 2007! That came despite softening demand for trucks in the US.
The US manufacturers are also correcting from mistakes of the past. Last year the UAW agreed to let GM and Ford switch retiree heathcare from defined-benefit to fixed-cost, taking billions of future obligations off the books. Now Ford beats Toyota in quality surveys. GM's new Chevy Malibu was voted 2008 car of the year over Honda's new Accord, and the other nominee on the ballot was the Cadillac CTS.
Short the auto stocks? Put that excellent advice in the time machine and send it back to 1999!
Andy, go back and take some classes in logic, philosophy, and investigative JOURNALISM. Or GOD, at least learn about cars. Orange Coast College in Costa Mesa should work.
DARPA created the Internet so intelligent forms of life could exchange information. The Internet has become in reality a giant steaming pile of written, audio, and video excrement, we would have never guessed this when TCP/IP was being developed. We assumed something better than "Beavis and Butthead online."
We were wrong. I post here only because this topic caught my eye. Good luck all.
It's true, a Subaru WRX is a <mechanically> well-engineered performance automobile, especially considering the much smaller engine it employs. But even a 4-cylinder sports car, like the WRX, will be lucky to get 15 miles per gallon if you're constantly stomping on the gas pedal, which, to me, makes the whole "smaller engine" point a moot one.
Finally, the issue you raised about interior quality. I won't sit here and defend US automakers as having designed high-quality interiors; in fact, I'm inclined to agree that many of the domestic models have, in the past, offered rather cheap-looking components and sub-par features. But I hope you wouldn't expect the interior of a Chevy Malibu to be as posh and well-appointed as that of (any) Lexus, for obvious reasons. Now more than ever, both luxury and performance come at a premium. Consider the WRX once more. Though I can't speak for the 2008 (as I haven't driven one), the previous generation WRX, despite all its eye-popping performance, was rather plain, generic and unexciting on the inside. It amounts to a tradeoff-if you want the rocket engine, but don't want to spend an arm and a leg, you'll have to give up some creature comforts.
So, just get back in your Honda take that nice ride home, just do me a favor, stay in the right lane because my V8 Mustang needs to get by!!!
Additionally he drove the landmark agreement between Ford and the UAW. He has exceeded each measurable target Ford has in place with the exception of sales in North America. Not bad for a guy who is new to the auto industry.
The "right" reasons are :
a. Some people just won't buy an "american" car even if its as good as non-american ones.
b. Those who could buy "american" can't buy one because of the credit squeeze.
How's that?
lol.
Financing and merchandising, any consumer products that need financing, be it automobile, appliances, etc. they co-exit or stop doing business. How does a lender make money if it doesn't lend money? It is the consequence of Wall Streets' own mess. Now I believe that the New Secretary of Treasure is a genious and just recently proposed a new plan to clear this mess. Will this plan go through? You guess it. There are so many ignorant blocks there at all levels. It takes a lot of effort to get everybody from different branches come to see the real picture. Until then, not only you can buy a car without "credit squeeze", but also people will be able to realize their dreams in their "American Homes" again. Let's hope it won't be long.
Disclosure: I have been short GM since November '07.
the article flies in the face of all that is happening at F.
the tape don't lie, man!
The Biggest mistake you could ever make is to say that the Shelby Mustang has only 319 horses. This proves that you did absolutely no research! The Shelby Mustang has a 500-hp 5.4L 32-valve supercharged and intercooled V8. The regular GT's have only around 300 hp. To get a true sense of what Ford is doing in fuel efficiency and technology I recommend that you log onto U-tube and search Eco Boost. There is a video of Derrick Kuzak out there that explains their plans for the immediate future. ( 2010 model year which buy the way is actually for 09 which is next year.
There is no doubt exports are up. And I even think cars (not just USA ones; ie including German ones) are doing well in China.
However, now that the dust has settled with the flurry of comments (esp the one about Andy being 19!), please see :
www.bloomberg.com/apps...