Robust job creation, solid wage growth, holiday season “end of year” showroom deals, a steep drop in oil and gasoline prices and a surge in November vehicle sales are revving auto stocks. Our favorite pick is something of a contrarian play: Ford Motor Co (F). Despite a disappointing November sales performance, Ford stock shows the most long-term promise among its competitors.
Auto stocks are enjoying a pretty broad boom at the moment. November auto sales jumped from an annualized rate of 16.3 million a year ago to 17.2 million vehicles.
According to analysts, the auto industry is on track to sell 16.8 million to 17 million vehicles in 2015, representing the first time since the end of World War II that sales have grown six consecutive years.
In addition to improved job and wage growth, other factors are clearing the road for faster auto sector growth. Low interest rates, pent-up demand, the construction sector’s recovery, and rising consumer confidence also play roles.
The Great Recession of 2008-2009 was especially harsh on the automobile sector, as demand for cars drove off a cliff. Tighter credit, ballooning household debt, rising joblessness, falling purchasing power, and declining confidence all convinced consumers to defer new vehicle purchases. Exacerbating the hard times for the auto sector was excess production capacity around the globe.
But now, the auto sector is making a complete u-turn, which has been benefiting auto stocks.
Ford Stock Has All the Right Moves
As major competitor General Motors Co. (GM) flounders amid its ignition switch scandal, Ford has been making all the right moves. To be fair, Ford sales declined 1.8% in November compared to the previous month, but the company is playing the long game. The automaker has purposely reduced the offerings of weaker selling models to shore up its balance sheet, invest in new technology and better position itself to ride the auto sector’s rise.
Ford has patiently laid the groundwork to take full advantage of the swelling tide of vehicle demand. In Europe, Ford has been cutting costs and offering a host of new and exciting models with stylish designs. Ford also is aggressively boosting production in China, a huge source of future opportunity for Ford stock.
According to Chinese government figures, China is home to 244 million people who are licensed to drive cars, the largest number worldwide. Currently, 264 million civilian motor vehicles are plying the roads of the Middle Kingdom, accounting for 15% of all automobiles in use in the world. Ford enjoys an impressive 3% of the Chinese market.
In the U.S., Ford has enhanced its small car offerings, achieving particular success with its well-received Focus and Fiesta subcompacts. With an eye to the future, Ford also has made enormous progress with its hybrid electric-and-gas powered models, with hybrid versions of its C-Max and Fusion that go head-to-head with the Prius made by Toyota Motor Corp (TM). Ford’s all-electric version of its Focus gets high ratings for fuel efficiency from the U.S. Environmental Protection Agency.
Meanwhile, GM’s commitment to hybrids has been tepid at best, after the company canceled hybrid versions of its Tahoe, Yukon and Escalade models due to poor sales.
At the same time, Ford remains a strong contender in trucks and SUVs, which confer higher margins. Indeed, among the top three sellers of all vehicles in November was the Ford F-150. The company’s advantage in the truck niche will pay off for Ford stock as construction activity continues to gain steam.
The Bottom Line for Ford Stock
The automotive sector faces its best prospects in years. Recovering global economies and a healthier U.S. job market are fattening wallets, sending ebullient consumers to showrooms in droves. Add gasoline prices averaging below $3.00 per gallon and you have excellent conditions for auto stocks that should persist into 2015 and at least 2016.
Compared to other auto stocks, Henry Ford’s legacy is best positioned to reap the benefits of the automotive sector’s resurgence, putting Ford stock in the driver’s seat for the long-term journey.
As of this writing, John Persinos did not hold a position in any of the aforementioned securities.
