2018 should not be a year of major upheaval for U.S. car manufacturers. In fact, industry watchers are predicting another strong year in what is being characterized as the quiet before the storm.
Hold on to your seat as the year winds down, however. Forecasters say chaos likely will take over the industry in 2019 and 2020 as a result of a series of market forces and technological advancements.
"This year, I don’t foresee any sort of crash,’’ George Peterson, president of AutoPacific, an automotive research and product planning firm, tells GuruFocus. “But the next five years are going to be nuts and the next 10 years are going to be crazy.”
In 2019, consumers will likely begin to ponder whether they really even need a car. By then, it is very possible that people could opt for an autonomous vehicle to come pick them up, Peterson said. Then there’s the service that ride-sharing companies like Uber provide to people looking for alternative forms of mobility.
“This is all beginning to lead into the complete chaos that we will be seeing in 2019 and 2020,” Peterson said.
Some automakers also are likely to cancel production of passenger cars, as consumers veer toward crossovers and SUVs. Ford, for example, could very well cancel the production of its mid-sized Fusion and replace it with the Ford Edge, a mid-sized crossover, says Peterson, whose firm is based in Southern California.
Other new developments will disrupt the industry, such as the emergence of electrical hybrids and cars with more high-tech features. In Europe, developers have embraced “atomizing.”
Meanwhile, China is going to give U.S. automakers a run for their money. They are building sizeable and sophisticated plants to compete with traditional U.S. automakers.
Ann Arbor, Michigan, is home to HAVAL, a premium SUV product by Chinese automaker Great Wall Motor Co. (GWLLY, Financial).
We’re also likely to see headlines for the Chinese multinational automotive manufacturing company known as Geely (GELYY, Financial). It sells passenger vehicles under Geely Auto, Volvo and LYNK & CO, which will be introducing cars in the U.S. in 2019.
American automakers like General Motors (GM, Financial) and Ford (F, Financial) will have to keep pace with the new competition flooding the market.
Cheap stocks
2016, like its predecessor, was a fruitful year for automakers.
America’s largest automaker, General Motors, delivered its second straight year of record earnings in 2016 with adjusted earnings per share of $6.12.
But things did not progress similarly in 2017 when General Motors and the other Detroit giants began registering disappointing sales declines.
In June, sales were down 3%, and any investor who wanted to research cheap stocks had nowhere better to look than in the automotive industry.
In May, General Motors stock was trading at $32.42 per share on the New York Stock Exchange.
So far this year, shares of the U.S. automaker, like others, are higher than they were last summer.
On Tuesday, General Motors traded for $44.28 a share.
GuruFocus gives General Motors a financial strength of 5 out of 10 and a profitability and growth ranking of 6 out of 10. Among the gurus that hold shares of General Motors: Joel Greenblatt (Trades, Portfolio) and Robert Bruce (Trades, Portfolio). George Soros (Trades, Portfolio) also has more than 185,000 shares of the company, according to Sept. 30 portfolio data reported to GuruFocus.
Just like General Motors, Ford shares are higher this week than they were last summer, according to GuruFocus data.
Ford shares traded at $10.57 a share in August.
On Tuesday afternoon, Ford traded for $13.16 a share.
GuruFocus gives Ford a 4 out of 10 ranking in financial strength and a 6 out of 10 in profitability and growth. Guru Richard Pzena (Trades, Portfolio) held more than 25 million shares of Ford stock, according to his portfolio as of Sept. 30, based on data from GuruFocus.
Other stocks to watch are those of Chinese automakers.
Great Wall Motor's American depositary receipts were trading at a little over $10 a share a year ago. On Tuesday, they were at $12.64 per share. GuruFocus gives the company a 7 out of 10 financial strength rating and a 8 out of 10 profitability and growth rating.
The same GuruFocus data shows Geely Automotive Holdings with a financial strength and a profitability and growth rating of 8 out of 10.
On Tuesday, Geely's ADRs were trading for $70.46 a share.
Survival of the fittest
It’s no secret that automakers have a rough road ahead. As capital expenditures rise in order to equip vehicles with snazzier technology, profits will be squeezed, some say.
Strategy&, a consulting firm that conducted a 2017 report on automotive trends, says the nation’s auto industry is more challenged than many people realize.
Earnings results over the last five years look positive. The industry gave to investors annual rates of return (including dividends) of 14.8% (S&P 500) and 10.1% (Dow Jones Industrial Average). In 2016, worldwide sales reached a record 88 million vehicles, up 4.8% compared to 2015.
But total shareholder return, the consultant said, was only 5.5%. And return on invested capital was 4%, about half of the industry’s cost of capital. The consultant says those two percentages "almost outweigh positive sales and earnings results."
“They paint a picture of a sector that is less attractive or less lucrative place to invest than other industries,” according to Strategy&, which is a subsidiary of PricewaterhouseCoopers (PwC).
Peterson, who has studied the auto industry for decades, believes some of the report’s conclusions are largely “speculative.” Things such as stock price “don’t really reflect how good these companies are,” he said.
But one thing he and consultants appear to agree on: The next five years will be pivotal for the industry.
“It’s going to be pretty dynamic,’’ Peterson tells GuruFocus.
