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These Automakers Are Accelerating Toward Growth

June 19, 2014 | About:
Vinay Singh

Vinay Singh

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Sales numbers for the automotive industry in the US are made public first thing every month. Foralmost two quarters, sales have been rising higher than in a long time. This is down to loans,which are easier to obtain once again, plus higher demand, which has been building up for awhile. The median age of cars in use is also at its highest in years.

Though it's not certain whether or not this trend will continue until the end of this year, a quickpeek at how the industry sales appeared in April should provide a little more certainty.

The automotive industry

The seasonally adjusted annual unit rate (SAAR) for light vehicles in April is more than 15 million, according to sell side analysts. Last year the figure stood at just over 14 million,compared to the 15 million run rate for March this year.

Understanding the difference between actual sales versus SAAR can be confusing. Salesfigures tell us how many units get sold during one month. But SAAR in turn tells us the rate atwhich cars are selling at a yearly rate. So if we say that in April the SAAR is 15 million, thismeans that in an estimation based on that month’s sales, it looks like overall that year there will be 15 million cars sales.

The whys and the wherefores

The fact that credit is easier to come by at this moment and many people are replacing their oldworn and torn cars, is cause for smiles. Pick-up truck demand is also strong, according toinformation from distribution channels. It is the smaller car though or the smaller utility vehicle thatis becoming more and more popular with consumers. This is why it is expected that the totalsales percentage of this segment will grow significantly on a year over year basis.

Promotions

The automotive industry seems to be keeping to a conservative line when it comes topromotional activity. Therefore the industry has shown a trend of low-lying sequential incentives increases – these have only slightly increased on a year over year basis. Having said this, Hyundai has been engaging in higher than average incentive activity. So has Toyota Motors (TM), on its Camry/Corolla. Both companies are attempting to hold onto their share of themarket for specific categories.

1. Toyota

Toyota lost some market share this month. Incentive spending has been chopped radically, although as I mentioned above, Toyota has affected an increase on incentives for Corolla and Camry.

Up until now Toyota has performed well as a favorite auto industry stock, mainly thanks to its variety. The forward multiple is around 13 times. The company’s operating profits are set to increase by 23% in the next two year. But the fact remains that incremental Camrys and Corolla revenues has already been priced in the current stock price.

Lexus, however, has gone from strength to strength in the US. Analysts think Lexus will significantly contribute to Toyota's profits this year. Lexus has helped Toyota in achieving much needed expansion in the luxury car sector – a segment that is known to have high margins. Lexus sales have been improved because Toyota produces high quality cars and its customers trust the brand. The prices are also more competitive now since the Yen is weaker. Plus new SUVs now offer diesel engines, thanks to technology bought from BMW.

2. General Motors

General Motors' (GM) recent sales trends are positive, and are expected to increase by 5% overall this year. The influencing factor seems to be truck promotions – the sales there arelooking to bump up to 10%. However, at the same time, total car sales are estimated to drop by 5% next month. Whilst GM is predicted to get an advantage from truck promotions this month,there have been problems with model transitions. Consequently a sequential loss of 250 bps was felt on the market share last month, but analysts expect a 75bps improvement in the marketshare next month.

Cheap stock

Generals Motors stock is cheap for buyers now and has been trading at forward multiple of 7 times; this is considerably below anything found in the consumer goods segment, which isshowing a 14 times multiple. Dan Akerson, GM’s CEO, is already gaining quite a reputation asa tough leader, true to his personality and style, and has sworn to do away with GM’s‘Government Motors’ rep. In Europe, GM is engaged in a very active restructuring process. Thisis a timely move, since the operations in Europe have long been affecting the company’sperformance, and not in a good way. The company’s current portfolio is also the auto industry’soldest. The management at GM now reckon that turning this portfolio over completely shouldtake them about 2 years.

3. Ford

Ford (F) sales are up by 15.5% since the beginning of this year. Though somecategories are being affected by tight inventory, total sales of cars are still predicted to rise by12.8%, and trucks by 16.2%. The Fusion is selling well, but its tight inventory (a little over a month) is having an impact. Focus follows close behind with 44 days, the Explorer 37 days. Ford is set to stay constrained on Fusion, until Flat Rock plant starts running.

Small car triumph

Now that people have less money due to the recession, small cars efficient on fuel consumptionare in demand. Ford says that its sales of small cars rose by almost 30% last year. The C-Maxhybrid’s sales have been extraordinarily good. The trucks in the F-series were in fact the best-selling vehicle of the light vehicles category in the US. A staggering 650,000 F-trucks were soldin 2012, and the stock is cheap at 9 times forward multiple, which is why it's recommended as buy by most analysts.

In conclusion

Auto companies in Detroit and Japan have been boosted by a higher SAAR in the US. General Motors and Ford are good buys because they are cheap. Operation overhaul in Europe will hopefully show positive sales numbers before long. Finally, Toyota is looking good thanks to Lexus, which is being revived once again.


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