Tags: ford | gm | chrysler | auto | stock

How to Play the Rev-up in Auto Sales

Wednesday, 04 January 2012 04:30 PM

General Motors , Ford Motor Co , and Chrysler on Wednesday each announced double-digit sales gains for the year, adding to confirmation that 2011 was a year of recovery for the U.S. auto market.

About 13 million cars were sold in the U.S. in 2011, according to preliminary estimates by top auto analysts, the most since the U.S. recession began in December 2007. That would mark the second year of higher sales in a row after sales bottomed at 10.4 million in 2009.

It's a trend that may have a long stretch of highway ahead of it.

Consumer demand and low interest rates will spur Americans to buy even more new cars in 2012, analysts said. But because sales will likely stay below their mid-2000s levels, auto parts suppliers may benefit as well as Americans keep older cars on the road.

With a broad economic slowdown already priced into shares, any hints that the U.S. economy will continue to grow in 2012 should lead to a boost in share prices throughout the sector.

Here are ways to play the resurgence of the car market.



U.S. automakers may have demographics in their favor. On one hand, an all-but-frozen auto market during the Great Recession has left the U.S. with the oldest vehicle fleet on record. At the same time, the number of licensed drivers is expanding at a pace slightly faster than overall population growth, meaning that there are more potential customers coming into showrooms.

A backlog of demand - boosted by relatively easy financing - should lead to broad gains for automakers in 2012, said Phil Orlando, chief investment strategist at Federated Investors. "The rising tide should lift all boats here."

Auto sales in the U.S. should top 16 million annually by the end of the year, a nearly 20 percent increase from 2011, Orlando said.

Investors who want to take a sector-wide approach should look to Fidelity Select Automotive (FSAVX), a $95 million mutual fund that invests in global automakers along with key suppliers like Johnson Controls and Goodyear Tire and Rubber.

There are two automaker-specific ETFs available, but their low asset bases give them in higher than average bid-ask spreads, analysts said.

Big American automakers could outperform the category, however.

Keith Goddard, manager of the $24 million Capital Advisors Growth fund (CIAOX), owns Ford and General Motors because of their recent success in taking U.S. market share from foreign rivals like Toyota.

Each has a U.S. market share of about 18 percent, compared with a 14 percent share for Toyota. Last year, Toyota had a market share of almost 16 percent, according to Motor Intelligence, a firm that tracks the auto market.

"The product lineup for domestic automakers is better than it has been in a very long time," Goddard said, citing rising resale values for recent models and ratings from sources like Consumer Reports.

Michael Ward, an analyst at Sterne Agee, rates General Motors a buy in part because of its strength overseas. G.M. is one of the leading car brands in China, he noted, and has an 18 percent share of the growing Brazilian market.

The company may be a value play as well. Concerns about a recession in the U.S. or Europe helped push its shares down 43 percent over the last year. It is now trading at a price to earnings ratio of 4.75, or about a third of the P/E of the broad S&P 500.



Even the most optimistic analysts see U.S. car sales remaining below 2005-era levels. And with unemployment lingering above 8 percent, many Americans are trying to make their cars last longer: The average car on the road is now more than 10 years old, a record age for the U.S. fleet.

That will likely spell continued profits for auto parts suppliers, said Sandy Villere, manager of the $112 million Villere Balanced Fund. One his main picks: O'Reilly Automotive. The company, which caters to both the do-it-yourself market and professional mechanics, operates 3,570 stores in 38 states.

"You've got more and more people trying to make a dollar last longer and are willing to do everything short of putting a duct tape on their car before they go and get a new one," he said.

The aging fleet is bolstering the company's profits. Earnings per share were up over 30 percent in each of the last two quarters, which is one reason why the company's shares have gained 28 percent over the last year. Villere expects the stock to continue gaining in 2012, especially if the global economy starts to slow.

AutoZone, a larger competitor with 4,627 stores in the U.S. and Mexico, is another option. Though its $319 share price is steep, it is trading at a reasonable price to earnings level of 15. Cid Wilson, an analyst at Cabrera Capital Markets, has an outperform rating for the company because of its improving margins and rising same-store sales.



Investors may want to avoid Japanese automakers in 2012. That's because the stronger yen is cutting into profits for vehicles exported to the U.S. and Europe.

The yen should continue to build against the dollar and other currencies in 2012, said John Praveen, chief investment strategist at Prudential.

The strong yen, along with lingering supply chain disruptions caused by last year's tsunami, is helping Volkswagen AG in the United States, said Rolf Kelly, a fund manager at the $25.1 billion Thornburg International Value fund (TGVAX).

"They have the potential to increase market share with all of the problems in Japan," he said. Kelly pointed to the opening of new plants in Tennessee and improvements in their manufacturing process worldwide as reasons why the company was able to recently lower the price of the Passat by $7,000 in the U.S. without hurting margins.

Volkswagen is also lowering prices in France and Spain because of cost-cutting improvements, helping it to gain market share in Europe - a market that makes up about 60 percent of the company's overall revenue.

The company's shares are down 4 percent over the last year as part of the broad decline in the German stock market. Its price to earnings ratio is just 3.5. "It's incredible how cheap the company looks on a multiple basis," Kelly said.

Kelly also suggests looking at Korean automakers like Hyundai and Kia because of the strong yen.

The strong yen benefits Korean automakers because the exchange rate makes their products comparatively cheaper when priced in dollars. Toyota, for example, is barely breaking even in the U.S. in large part because a strong yen eats into its manufacturing and production costs, Kelly said.

The yen is up 16 percent over the dollar over the last two years, including a 5 percent jump over the last six months.

"[These companies] are really the ones capitalizing on it," he said. "They can sell the Sonata for the same price as a Camry and make a much greater profit on it because of the currency issues."

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Wednesday, 04 January 2012 04:30 PM
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