3 Things We Just Learned About the Carmakers

Among the mixed messages are these overall trends

   
3 Things We Just Learned About the Carmakers

“If I had asked people what they wanted,” the great Henry Ford once quipped, “they would have said faster horses.” The father of the Model T was right — for a while. But when General Motors CEO Alfred Sloan realized that customers wanted style, variety and colors other than black, he was able to kick the “Tin Lizzie” to the curb.

Giving the customer what he or she wants is the secret of companies’ success. But in a capital-intensive industry like auto manufacturing with long lead times from design to production to showroom, it’s hard to align products with consumers’ changing tastes. Global economic uncertainty and volatile fuel prices make the challenge of bringing the next top models to market doubly hard.

That theme appeared to be running through automakers’ most recent earnings and auto sales data. U.S. auto sales were strong in April, holding steady at an annualized rate around 14.4 million vehicles. However, the pace of growth was much slower than last year’s. And perhaps worse, a disappointing April jobs report on Friday raised concerns over a slowdown in the U.S. economy.

Fiat‘s (PINK: FIATY) Chrysler unit soared last month, while General Motors (NYSE:GM) and Ford (NYSE:F) slipped. Toyota (NYSE: TM) staged a comeback from last year’s earthquake and tsunami-ravaged production shortfall, while Japan-based rival Honda (NYSE:HMC) continued to struggle.

Although some analysts see a lot of green lights ahead for automakers, headwinds from Europe’s sovereign debt crisis have wreaked havoc on quarterly earnings. Elections in Greece and France are giving the market new jitters about Europe.A slowdown in China’s white-hot growth rate also threatens to curb the auto sector’s upside in the near term.

Despite all these mixed messages in sales and earnings data, here are three things we learned about the auto industry in April:

Sales Performance Was Mixed

Winners: Chrysler scored the biggest gain in April with a 20% increase in sales to 141,165 vehicles — its best April since 2008. The midsize Chrysler 200 sedan led the pack with a 61% jump, but there was less interest in Chrysler’s compact cars like the Dodge Caliber, which fell 61%.

Toyota rebounded from last year’s earthquake and tsunami woes with a 12% sales rise to 178,044 vehicles — only 1,600 short of stealing back second place from Ford. Toyota’s Prius family of hybrids are selling fast, sitting on dealer lots only 25 days rather than the industry average of 60. Camry sales (including hybrids) rose 36% last month.

Losers: GM April sales fell 8% to 213,387 as its GMC brand was the only one to post an increase — of just 4.5%. Chevy sales were down 8%, Buick fell 16% and Cadillac plummeted 25%. Last year’s star, the Chevy Cruze compact, fell more than 27%.

Ford sales slipped by 5% as the Fiesta subcompact dropped 44%. On the upside, Focus sales rose more than 57%, and Ford sold a record 21,610 Fusion midsize sedans. Sales remained flat in Ford’s Lincoln luxury nameplate.

Honda, which also suffered the impact of last year’s Japan disaster, didn’t get Toyota’s bounce — sales were flat at 122,012 vehicles. Honda’s sales leaders were the CR-V compact crossover and the Accord, while the Pilot midsize crossover dropped 7%.

Europe Is Everybody’s Pothole — and China’s Slowdown Won’t Help

Last week, GM reported that its first-quarter earnings fell 69% — with a $256 million loss in Europe alone — and a nearly $600 million charge to write down its European assets. Profit also fell to a lesser degree in China and South America.

Ford’s first-quarter earnings fell 45% on disappointing performance in Europe and Asia. The company sold 60,000 fewer vehicles in Europe and 25,000 fewer in Asia-Pacific compared to the same period a year ago.

Chrysler’s strong North American results helped offset Fiat’s problems in Europe.

Toyota, which reports quarterly earnings on Wednesday, should take less of a hit because of lower exposure to Europe. However, TM is gearing up to fight for European sales with new models like the Yaris hybrid, Europe’s first hybrid subcompact.

Honda’s sales fell 20% in Europe and 14% in Asia.

Car Buyers Went Bigger

Despite carmakers’ bragging about smaller, more fuel-efficient vehicles, consumers felt the love for larger cars and trucks last month. “In April, we saw a slight increase in sales of trucks and SUVs, which factored into the decrease in the actual fuel economy of cars sold,” said Jesse Toprak, Vice President of Market Intelligence at TrueCar.com

Chrysler’s Jeep and Ram pickup sales each rose 19% during the month. The GMC Sierra and Chevy Silverado pickup also posted big gains. Subcompacts like the Ford Fiesta fell out of favor, as did electric vehicles like the Nissan Leaf.

Perhaps it means that despite incentives, consumers are willing to roll with high gas prices to get the car they really want. Many of the larger vehicles on lots today aren’t gas-guzzlers, so automakers that bigger vehicles with 30+ mpg could score. But automakers that fail to deliver what consumers desire do so at their own peril — as Henry Ford eventually learned with his Model T.

Bottom Line

So what does all this mean for auto stocks? Fuzzy answer: Different strokes for different stocks. I’ll start by dismissing three automaker stocks right off the bat: Chrysler, Honda and Toyota. To buy Chrysler, you’re stuck buying Fiat since CEO Sergio Marchionne said recently that a Chrysler IPO was unlikely in 2012 “if it’s an event at all.” And Chrysler is the single point of light at that European carmaker.

While Honda is improving (earnings rose more than 60% in the first quarter), its most recent quarterly earnings missed on the top and bottom lines. Toyota, which is driving back to glory, is just too pricey right now. It’s trading in the $79 range, it has a price-to-earnings-to-growth ratio (PEG) of 1.45, which indicates it’s overbought (with 1 being fairly valued), and it has a forward P/E of about 12 — much higher than its peers.

That leaves Ford and GM. With a market cap of $40.6 billion, Ford is trading around $10.50 — down about 29% year-to-date. It has a PEG ratio of 0.7, indicating that it’s undervalued and an attractive forward P/E of 6.6. It pays a dividend with a current yield of 1.9%.

GM has a market cap of $35 billion and is trading in the low $22 range – it’s down 30% year-to-date. GM has an ultra-low PEG ratio of 0.4 and a forward P/E of 6.4. It doesn’t pay a dividend.

Both carmakers are in a similar fix in Europe, a situation that won’t resolve anytime soon. Ford and GM both experienced slips in U.S. sales of 5% and 8%, respectively. Both will have to contend with any slowdown in the U.S. economy, as well as the competitive threat of a resurgent Toyota.

Nevertheless, I give the win to Ford for four reasons:

1. The federal government still owns a 26% stake in GM and won’t be selling its shares anytime soon because of the hefty potential loss to taxpayers. According to a recent survey of new-car buyers, 32% of those who did not buy a GM car said it was because of the bailout.

2. Ford’s year-to-date sales are up 5%, while GM’s are down 0.4%. GM’s weaknesses in three of its four brands prompt caution, as do steep declines in some of Chevy’s biggest sellers from last April: Cruze fell 28%, Impala fell 29% and Malibu fell 11%. While Ford has weakness in its luxury Lincoln nameplate, buyers are wild about the new Focus, and the F-Series pickup was April’s top-selling vehicle.

3. Longer-term, I think Ford’s global car platform will enable the carmaker to gain manufacturing efficiencies that eventually will boost margins — particularly internationally.

4. I like dividends, even small ones.

Although all automakers are facing a lot of headwinds, I think F is a bargain right now. I rank it a buy, with a price target of $15.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/05/3-things-we-just-learned-about-the-carmakers/.

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