by Jim Woods | August 21, 2013 10:27 am
There’s never been a better time to for the typical American to own and operate a car.
That’s the conclusion drawn by economist Mark J. Perry, a professor at the University of Michigan and a scholar at the American Enterprise Institute. In a recent AEI blog post, Perry uses five charts to reveal the five biggest today’s cars have improved over their predecessors: longevity, fuel efficiency, safety, low financing, and cost.
For stocks in the auto space, each of these metrics has positive implications. Let’s take a closer look at each of these ownership positives and see who the potential winners might be.
According to Perry, “the average age of cars on the road in the US reached an all-time high this year of 11.4 years, which is a full 3 years longer than the average age of cars in 1995.”
Perry ascribes this change to the fact that vehicles today are of better quality, more durable and more reliable than in the past. I think this is somewhat true, although I also think that the Great Recession forced consumers to hang to cars a lot longer than they ever wanted to. Moreover, the bottom dropping out of the housing industry in 2008-09 hurt purchases of construction-related vehicles such as pickup trucks.
For automakers, especially those who sell a lot of pickup trucks such as Ford (F), General Motors (GM) and Fiat’s (FIATY) Chrysler via its Dodge Ram brand, the fact that there’s an aging fleet of vehicles out there means a greater likelihood that consumers will look to replace those vehicles in the years to come.
Another potential group of winners here is auto parts suppliers, because older cars still require routine maintenance. Players such as Advance Auto Parts (AAP), AutoZone (AZO), O’Reilly Automotive (ORLY) and Pep Boys (PBY) provide the majority of that maintenance.
In addition to lasting longer, cars are getting better gas mileage. Perry shows that “the average fuel economy for US light vehicles in July reached 24.5 mpg, establishing a new all-time record high for fuel efficiency … In just the last six years, average fuel economy has increased by 19%, from 20.6 mpg in 2007 to 24.5 mpg this year.” The increased fuel economy means lower costs for consumers at the pump, and that makes us all better able to cope with a rise in gasoline prices.
This is a circumstance that’s good for consumer discretionary spending, as it means more money in our pockets. It could also mean a boost in overall revenue for companies that make up the Consumer Discretionary SPDR (XLY). Some of the largest components of that index include Comcast (CMCSA), Disney (DIS), Home Depot (HD), Amazon.com (AMZN) and McDonald’s (MCD).
On the safety front, Perry argues that “motor vehicle fatalities in the US, adjusted per 100 million vehicle miles traveled, have consistently declined over time, according to data compiled by the National Highway Traffic Safety Administration.”
This safety improvement is hard to quantify in terms of productivity and the potential impact on the economy and specific stocks, but the safer Americans feel behind the wheel, the more economic activity we’re likely to see. In other words, people feeling safe on the roads likely means more travel, more travel spending and more spending on leisure activities.
Potential beneficiaries of this trend include stocks that in the PowerShares Dynamic Leisure & Entertainment ETF (PEJ). Some of the fund’s top holdings include Starbucks (SBUX), Wynn Resorts (WYNN) and Starwood Hotels (HOT).
Getting an auto loan these days is dirt cheap, and that’s because the cost of borrowing has been kept at rock-bottom levels by the Federal Reserve. Perry uses the Fed’s own data to show that financing a new car has never been cheaper.
“In 1981, when the car loan rate peaked at 16.8%, the monthly payments on a $20,000 car loan would have been $575. At today’s rate of 4.1%, monthly payments on a $20,000 loan would be only $452. Over the four years of financing, a 4.1% car loan rate today would save a borrower more than $5,900 compared to the 16.8% rate in 1981.”
Here again, car manufacturers will benefit from the low cost of financing. But auto dealers also stand to benefit, including national chains such as AutoNation (AN), CarMax (KMX) and Penske Automotive Group (PAG).
Perhaps the biggest takeaway from Perry’s piece is that when it comes to cars, they are more affordable than ever before. By showing a chart of the monthly Consumer Price Index for all items vs. the CPI for New Cars vs. an index of the Average Hourly Wage for Production and Nonsupervisory Employees in the Private Sector (adjusted to equal an index value of 100 in January 1995), Perry demonstrates the following:
“Since 1995, wages have increased more than 75%, and prices for all consumer goods and services have increased by almost 55% on average. In contrast, the CPI for new vehicles has remained almost flat for the last two decades and has increased only 4.4%. That means that after adjusting for inflation and quality improvements, the price of new cars has fallen by more than 50% since 1995! And compared to the increase in wages, the price of new cars has fallen by more than 70%!”
When it comes to the affordability of the vehicles that are owned by 95% of U.S. households, Perry says that today’s consumers are many times better off than the consumers of any past decade. As Perry puts it, we are in a “golden era” of auto ownership.
This affordability metric argues favorably for just about every major automaker, including the aforementioned Big Three U.S. manufacturers, as well as giants such as Toyota (TM), Honda (HMC), Nissan (NSANY) and Volkswagen (VLKAY).
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.
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