Buy Into the Automotives Before Their Resurgence
Ash is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Around this time last year R.L. Polk & Co, a global market intelligence firm, discovered and announced that Americans are now buying and holding onto their new vehicles for a record amount of time. New car owners are expected to keep their cars for a record 71.4 months on average, while used car owners are expected to hang on to their vehicles for an average of 49.9 months.
The buy and hold trends in the vehicle industry can be attributed to any number of things, such as better build quality, a weak economy or even a more difficult approval process for financing. R.L. Polk & Co expects 2015 to be the year that the U.S. auto industry regains its pre-recession levels. Should we invest in the car market now, before its resurgence?
How to Play It?
There are three ways I could think of, without delving into component manufacturers, to play the car game. The first is with an investment in an American car company such as Ford (NYSE: F) or General Motors. The second is an investment in an overseas manufacturer such as Honda or Toyota Motor (NYSE: TM). The third idea is to play the used car game. If the economy doesn’t improve, or if people still want to seek out a bargain, then used cars is the way to go. CarMax (NYSE: KMX) is probably the best way to play the used car game.
There has been a big marketing push as of late for Americans to buy American made products. While vehicles source parts from across the globe, a play on Ford or GM may be a good way to play the 'buy American' craze.
I went with Ford for the article because I believe they’re the better positioned company going into the next decade. Ford has been focusing a lot as of late on what consumers really want, their vehicles are being redesigned and they’re getting some of the best mileage around. If Ford can keep this up then they’ll definitely continue to be one of the bigger forces in the motor industry.
Ford beat the market significantly over the last six months by posting gains north of 40%, even while paying out a dividend that’s yielding 3.07%. The latest EPS numbers out of Ford finally give the company an actual P/E ratio of 9.32, pretty low considering that the analysts’ consensus shows earnings growing over future years. Fiscal Year 2012 brought Ford earnings of $1.41 per share; analysts’ estimates put that per share figure at $1.80 by FY 2014 end.
The Toyota Camry is one of the biggest selling cars in the United States so it’d make sense to invest in the company that makes it, right? Well, Toyota has had a few hiccups over the last few years with their acceleration issues, failing brakes and numerous recalls but this company is poised to be back to normal quite soon and you should be there before it arrives for the biggest gains on your capital.
The current P/E at Toyota is 16.1. Toyota’s analysts believe the company will have per share earnings numbers of $7.18 when FY 2013 comes to a close and another 13% gain on top of that to $8.11 by FY 2014 end. Those types of numbers justify the P/E that Toyota currently has in the car manufacturing industry.
Used car buyers replace their cars more frequently than new car buyers so why wouldn’t you consider investing in one of the nation’s biggest used car dealerships?
If you are considering it, CarMax is a great option. CarMax has more than a hundred superstores across the country. If you can’t find the car you want at your local CarMax, they’ll bring it to you. The company is showing EPS growth over five years of 28.63% and analysts are projecting growth of 4.21% and 10.06% in FY2013 and FY2014 respectively.
Of course, you will be paying a little more for an “in” on one of the largest used car dealers in the nation. The P/E ratio is 21.95 and there is no dividend.
I believe there will be an auto resurgence and that all three stocks in this article are great ways to play it. CarMax may see a slip in sales in boom years but it is definitely a long term holder through thick and thin. Both Ford and Toyota will continue to make great vehicles, and hopefully make less mistakes along the way.
Ash1402 has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. 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!