New Auto Ad Strategies Energize the Sector

by Lawrence Meyers | May 30, 2012 11:30 am

Sometimes the best way to get a line on how the economy is doing is to talk to somebody who sells advertising. These folks have a finger on the market’s pulse, even though they may not realize it, because they know who is spending and how much.

For instance, I have a friend who sells advertising for a big public radio conglomerate, and a recent conversation revealed some handy information about the auto sector.

The latest trend coming from the corporate offices of the major carmakers has been to encourage local auto dealerships to spend a lot of money to remodel their showrooms. The goal is to provide the customer with more of an “experience” — presumably one that still relieves the customer of as much money as possible while delivering a quality product.

That has created a lot of tension[1] between dealers and the carmakers. The National Automobile Dealers Association published a study demonstrating that while dealers like the concept of remodeling, the economic burden and return on investment just plain stinks[2].

So, local dealers are changing advertising terms with the auto companies. In the past, a local dealer’s ad budget might be matched one-to-one by the carmaker. Now local dealers, in exchange for remodeling showrooms, are asking for two or even three times the match. Consequently, a lot more money is going into auto advertising, which helps to drive sales in the auto industry.

It isn’t just radio, though. Borrell Associates forecasts that overall auto ad spending will rise 14% this year, with 40% of it going to digital — despite General Motors‘ (NYSE:GM[3]) recent decision to stop buying ads[4] on Facebook (NASDAQ:FB[5]).

That’s a $31 billion advertising juggernaut headed your way. You won’t be able to turn around without seeing an auto ad.

And that frenzy starts now! The summer is when the big ad spends occur, and many of the year’s 13.5 million to 14.5 million car sales will happen during this period — the best in five years. Ford (NYSE:F[6]) and Chrysler won’t be shutting down their plants this summer as they often do. Yes, high prices will deter some buyers, but dealer incentives may offset some of that.

So, how do you play this big ad spend? Buy the automakers, and buy the companies that sell advertising. The question is which carmakers do you buy? After all, trends come and go. If you look at year-to-date sales, then you go with Chrysler, whose sales are up 20% overall this year. Well, Chrysler is now 60% owned by Fiat (PINK:FIATY[7]).

Then there’s Toyota[8] (NYSE:TM[9]), where sales are up 12%, thanks to a 29% increase in domestic car sales. The company’s earnings were up fourfold in the fourth quarter, and free cash flow remains especially robust. Toyota has gotten past its manufacturing defect issue and remains a quality company.

Mercedes Benz has been on a tear, with sales up 27%. Mercedes is owned by Daimler (PINK:DDAIY[10]). However, one should be aware that the rich may be pulling back on their spending[11] as evidenced by Tiffany‘s (NYSE:TIF[12]) weak quarterly report.

You may even want to buy into advertising agencies, since they’ll be getting paid to produce those ads. Have a look at WPP (NASDAQ:WPPGY[13]), with its 4.5% yield and generous free cash flow.

Lawrence Meyers does not own shares in any company mentioned.

  1. created a lot of tension:
  2. the economic burden and return on investment just plain stinks:
  3. GM:
  4. to stop buying ads:
  5. FB:
  6. F:
  7. FIATY:
  8. there’s Toyota:
  9. TM:
  10. DDAIY:
  11. the rich may be pulling back on their spending:
  12. TIF:
  13. WPPGY:

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