Although Vice President Joe Biden recently credited the Obama administration with saving the U.S. auto industry, it was President George H.W. Bush, in his last few days in office that gave the Detroit companies $17.4 billion in loans after Congress refused to approve an emergency loan package.
In addition, the Canadian government and the province of Ontario provided Chrysler with loans. In return for these loans, Detroit was supposed to develop a restructure plan by February 2009. It is rather an outstanding feat that Chrysler recently announced the repayment of loans to the U.S. and Canadian governments as well as to Ontario.
Both GM and Chrysler won billions of additional dollars from the Obama administration and more importantly were allowed to go through bankruptcy court in the summer of 2009.
It was only Ford that refused any government aid and succeeded in returning to profitability in 2010. Its strategy of debt for equity exchanges was successful in erasing billions of liabilities. The restructuring gave the U.S. auto industry the capability to compete with the Japanese in the small-car category. It seems that with the increase of gasoline prices U.S. drivers are enthusiastic in buying small ,reliable energy efficient cars like the Ford Fiesta, Ford Focus as well as Ford hybrid cars and hybrid SUVS.
Detroit now has hybrid and electric cars that can compete with the Japanese. Not only are the Detroit Big Three gaining market share from Toyota but are also becoming less U.S.-focused and more export-oriented to emerging economies like China and Latin America. China, once a nation of bicycle riders, is now on the way to overtake the United States as the global leader in car ownership.
The latest U.S. car sales figures in May show that for the first time Detroit’s Big Three had a bigger market share than the Japanese automakers. Toyota and Honda Motors were the automakers hardest hit by Japan’s earthquake and had a sharp decline in U.S. sales. It isn’t clear how long it will take for Japan’s automakers to fully recover and return to full production.
How can investors profit from this trend? Although most analysts aren’t bullish on the auto industry in general, there are a few stocks that have underperformed and have good potential for long-term investors.
Both U.S. auto manufacturers – Ford and General Motors – will benefit from the inventory shortages and production cuts of Japanese manufacturers. Ford currently has one of the lowest P/E ratios in the auto industry and exports 55 percent of its production with rapid growth in the Asian – Pacific region.
With nearly 17 percent market share in the United States, Ford is well positioned to increase earnings when sales of SUVs and pickup trucks start to rise, assuming the economy recovers and gasoline prices continue to drop. Fiat recently paid $500 million for all of the U.S. Treasury’s holdings and now owns over 50 percent of Chrysler. Sales of Chrysler’s new models are in big demand and the company started rehiring.
Non-U.S. auto manufacturers such as Daimler have good operating margins, cheap valuation and a dividend yield of 4 percent. Daimler not only produces Mercedes, Maybach and Smart cars but also various truck brands. Daimler surprisingly also has a variety of stakes in other companies, such as Airbus Industries, Tesla Motors and Renault/Nissan. In the U.S., Mercedes had nearly a six percent increase in May sales.
Other international auto companies, like Volkswagen, are also listed on the U.S. stock exchange and benefit from the boom in Asia, especially China. It seems the preferred auto choice in China of the ‘nouveau riche,’ as well as top government bureaucrats and politicians, are Mercedes and VW/Audi brands. In the latest U.S. May car-sales figures, VW/Audi had a sharp increase – their strongest sales month in seven years.
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