The Top-Down Car Market

Sep.18.12 | About: Ford Motor (F)

The best way to see how uneven the recovery is, so far, is to drive around. Or talk to a car dealer.

The high end has come back first. Big SUVs and pickup trucks are moving ahead of the higher-mileage sedans and minis. That's because higher-income consumers are doing better than the lower middle class.

This has been a lucky break for Tesla (NASDAQ:TSLA), the luxury electric car nameplate. The company's $100,000 Roadster has nearly sold out of its initial run. This has given the company time and space with which to tweak its robot-driven factory and start work on the Model S, which is now available on eBay at $47,000 over the sticker price before it's even built.

It's a game of "follow the money." Rather than seeing an across-the-board recovery, car makers are seeing growth in specific geographies with specific demographic groups, mainly on the high end.

The success of the high-end market has given main-line companies like Ford (NYSE:F) the chance to plan production of large, high-mileage vehicles, which are now starting to hit the market. The company's Fusion hybrid has gotten a 47 mpg estimate from the EPA, twice what smaller, older sedans like my Toyota Scion were able to get.

Data from Edmunds indicates it's the higher end of the midsized market that is also breaking fastest. Midsized sales are up 26% in a market that is growing at a 15% rate overall. This only seems to go against expectation. A $4/gallon gas price was supposed to support the highest-mileage vehicles, but buyers are refusing to compromise on range, features, or comfort -- even if they prefer an electric or hybrid.

So while there are big profits in some places, Ford has to balance this against hard times in other geographies, like Europe. It is going to have to become more financially flexible, cutting production where it's needed and increasing it elsewhere, until the recovery becomes more general.

All it means is that the recovery in car sales may look fast where you are, but the general lift to the stock is going to be more gradual. It'll get there, but it'll take time -- and maybe more time than some investors have.

Disclosure: I am long F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.