by Charles Sizemore | March 5, 2014 9:20 am
It seems that Tesla Motors (TSLA) is the only auto stock that anyone wants to talk about these days. It’s easy enough to understand why — the stock is up about 70% year to date. And that’s after returning more than 300% in 2013.
But as exciting as the Tesla story has been, we should remember that other auto stocks are more important to the overall auto industry. Tesla expects to sell 35,000 cars this year. To put that in perspective, the global auto industry sold 82.84 million vehicles last year. Tesla, if it meets its goals, will account for 0.04% of global auto sales in 2014.
Not to minimize what Elon Musk has accomplished in creating an attractive, high-performance vehicle that is environmentally friendly … but frankly, Tesla doesn’t matter all that much to the global auto industry.
Apart from Tesla, auto stocks are in the news this week. AutoZone (AZO), the largest American retailer of auto parts and accessories, announced second-quarter earnings today and knocked the ball out of the park.
AutoZone reported profits of $5.63 per share, up from $4.78 per share the previous year. Revenue increased 7.3% to $1.99 billion, and same-store sales grew 4.3%. Analysts polled by Thomson Reuters expected per-share profit of $5.55 and revenue of $1.97 billion.
As the average age of cars on American roads continues to hit new highs — it hit 11.4 years last year — AutoZone should continue to see a steady stream of business, as will some other auto stocks.
Let’s take a look at some other auto stocks that I expect to do well over the next year.
At the top of the list of auto stocks is German luxury automaker Daimler AG (DDAIF), the maker of the Mercedes Benz.
I admit, I’m a little partial to Daimler. It’s a core holding in my Macro Trend Investor portfolio and it was the winner in InvestorPlace’s Best Stocks for 2013 contest.
But even after returning 65% last year, Daimler is surprisingly cheap. It trades for just 10 times earnings and 0.61 times sales, and DDAIF stock sports an attractive 3.4% dividend. Daimler is also surprisingly cash heavy; it has nearly a quarter of its market cap in cash and equivalents.
Daimler has what I would call a “high-quality problem.” It can’t produce cars fast enough to meet surging demand, which is exactly the kind of problem that auto stocks want. At a recent press conference, Daimler CEO Dieter Zetsche commented that “We can hardly produce as many cars as customers are asking for. Our product offensive is really just starting to take off.”
Daimler’s plans are ambitious. Zetsche’s stated goal is to surpass rival BMW (BAMXF) and Audi AG to become the world’s largest luxury automaker by the end of this decade. And part of this plan involve unveiling 18 entirely new models and 12 substantial redesigns.
And for all the talk of a Chinese hard landing, China’s wealthy seem to have no problem affording luxury German autos, which is good news for auto stocks like DDAIF. BMW is expanding two of its factories in China to meet demand there, and Daimler, BMW and Audi have all indicated that the Chinese market remains exceptionally strong.
Next on the list of top auto stocks is one that, just a few years ago, I would have never believed I would recommend: American auto giant General Motors (GM).
There’s a lot to like here. As I wrote in January, GM recently reinstated its dividend after a multi-year hiatus following the meltdown and Great Recession. The reinstatement of the GM dividend was the final plank in the company’s efforts to become a “normal” company again.
GM was snidely called “Government Motors” after years of controversial government bailouts and direct ownership, but as I wrote late last year, the government sold off its remaining GM stock, and General Motors is officially free of government ownership.
GM does not have the raw sex appeal of auto stocks like Tesla or even Daimler. But it is the world’s second-largest automaker after Japan’s Toyota (TM), and after its reorganization and product portfolio slimming, it’s a lean, formidable competitor.
Looking at GM stock, the story gets better. GM trades for just 7.5 times forward earnings and 0.37 times sales — numbers that make the cheap DDAIF stock look expensive by comparison. It also pays a healthy 3.3% dividend that I expect to rise in the years ahead.
Does GM still have its problems? Of course. The United Auto Workers were weakened by the bankruptcy, but not broken. GM still has large legacy pension liabilities to contend with, and if GM really becomes a powerhouse again, you can expect labor to do what it has always done and demand a disproportionate share of the spoils.
GM is also lagging rival Ford (F) in product innovation. Ford shocked the market with the introduction of an aluminum-bodied F-150 pickup truck in January. That aluminum body shaves several hundred pounds off the truck’s weight and offers better gas mileage.
Still, given the pent-up demand after years of sluggish auto sales, I would expect GM to enjoy a fantastic year in 2014, compared to other auto stocks. And don’t be surprised if GM follows Ford’s lead and offers an aluminum-bodied Chevy Silverado.
If you’re looking for something a little more exotic, consider Chinese automaker Great Wall Motor Company (GWLLF).
If you’re not familiar with Great Wall, you should be. It’s China’s largest SUV and pickup manufacturer, and it has traded in Hong Kong since 2003. The company has been ranked among Forbes Top 100 Chinese Enterprises twice, and it made Barron’s list of the Top 10 Chinese Brands You Must Know.
Chinese stocks have had a rough start to the year, and Chinese auto stocks are no exception. The U.S. ADRs — which trade over the counter — are down about 30% from their late 2013 high. The shares currently trade hands at 10 times earnings and pay a 2.0% dividend.
I should be very clear here: Great Wall is not in the same league as auto stocks like Daimler or even GM when it comes to management or financial transparency. It is a Chinese company and comes with all the risks that investing in China entails.
But if you believe — as I do — that the Chinese economy is undergoing a structural change that will favor domestic consumption over production for export, then it makes sense to have exposure to Chinese automakers like Great Wall.
One word of caution: The American ADRs are thinly traded, so be careful when placing and order. Use a limit order and consider breaking any large orders into smaller lots that can be traded over the course of a couple trading days.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long DDAIF. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
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