What’s Driving Automakers?
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A slow groan can be heard as my friend turns his key in the ignition. The starter clicks repeatedly, desperately trying to awaken the aging engine. Seconds go by, nothing.
A quart of oil, a call to his father, and a couple of prayers later, the engine coughs to life. As we sit back in our seats, a row of warning lights flicker across the dashboard. I glance at the odometer and note that the elderly vehicle has just passed 200,000 miles. I gently break the news to my friend that it’s time for a new car. With a laugh he replies, “All in good time.”
Making good time
As it turns out, many people think right now is a “good time” to purchase a new car. According to the Wall Street Journal, April new car registrations in Europe rose by 1.7% over last year. While this might seem like a marginal increase, 1.7% equates to approximately 1.04 million cars. That’s a huge increase for automakers considering they just experienced 18 straight months of new car registration decreases.
While markets have grown an impressive 15% this year, automakers were able to drive their returns even higher. That statistic raises an obvious question: what caused these gains?
General Motors (NYSE: GM) is weary of its infamous nickname “Government Motors.” In 2009, the company was on the verge of bankruptcy and had to rely on a bailout from the Whitehouse. As a result, the government took a 60% equity stake in General Motors. Thanks to the efforts of CEO Dan Akerson, that number is down to about 16%. The company’s continued departure from governmental support should signify to investors that GM is back on its feet.
A few weeks ago it was announced that General Motors would replace ketchup maker Heinz in the S&P 500. Inclusion in the S&P 500 will generate additional demand for the stock because index funds such as the iShares Core S&P 500 ETF will be forced to purchase shares of General Motors. In order to replicate the movements of the S&P 500, most index funds are required to have shares of every company in the index they are tracking. General Motors is no exception. With hundreds of index funds vying for General Motor’s stock, the price should rise.
While General Motors is looking better, it hasn’t quite yet made the recovery Ford (NYSE: F) has made. Much of Fords recovery and growth can be attributed to CEO Alan Mulally. After Mulally’s hiring in 2006, Ford began to produce “quality” cars and the company has since been able to compete with, and even beat, foreign automakers. Last year the Ford Focus overtook the Toyota Corolla as the world’s best-selling passenger car.
In recent months, Ford took the battle to the home of foreign automakers: China. Ford’s sales in China increased 45% since this time last year. Ford slowly acquired knowledge about Chinese consumers and tweaked its products accordingly. Selling unique vehicles that are produced in China have generated large profits for the automaker. Due to the enormous potential of Asian markets it seems Ford’s growth is here to stay.
There’s a lot to like about Toyota Motor (NYSE: TM). While many car makers have floundered during the financial crisis, Toyota remained consistently strong. In May, Toyota announced an 18% revenue increase to $220 billion dollars. Despite increased competition in the US, Toyota is eyeing the prize of being the automaker that will sell 10 million cars in one year. It’s best so far? 9.75 million in 2012.
Developing markets, however, have yet to be checked off of Toyota’s to-do list. Look for production and sales to increase in Southeast Asia and South America. Lastly, as long as the yen continues to depreciate in value, Toyota will see its profits and stock rise. A weaker yen leads to greater operating profits from exports, ultimately raising Toyota’s bottom line.
Tesla’s product is unique. The world has yet to see an electric car as good as Tesla’s Model S. The car’s battery has a 300 mile radius, meaning the car can travel 300 miles on a single charge. A purely electric car has never supported a range this large in between charges. When it’s time to charge, Tesla’s supercharger stations allow owners to charge their cars in just 20 minutes. Most importantly, the car looks good. And according to Consumer Reports, its performance scored an overall 99%.
Tesla’s future looks exciting, and traders are noticing. I expect that increased production will cause this stocks’ meteoric rise to continue.
Time to buy
While centered in Europe, people around the world are buying cars again. As long as markets remain stable, and economies slowly recover, the auto industry will see sustained growth. Market pundits are predicting another recession, but until that day comes, I say it’s time to buy. And for my own sake, I hope my friend joins the trend. What car should he buy? Tell me in the comments.
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This article was written by Joshua Sauer and edited by Chris Marasco. Chis Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!