They Don't Drive Any More
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A recent AP story reported women with driver's licenses outnumber men for the first time. But the real takeaway from the report is that younger drivers, especially males, just aren't that interested in getting a license or owning a car. Where feasible they prefer to take public transportation and work on their laptops or tablets or just text on phones while riding.
Why aren't young people driving? Aside from the huge insurance premiums and the costs associated with owning a car the story correlated high internet usage with lower numbers of drivers licenses among young people. Ford (NYSE: F) and General Motors (NYSE: GM) can't be liking this news.
A seachange in their sales tactics and promotions is more than likely, it's critical. And as tech-friendly with hands free sync and so on as they'd like to be, car companies are highly regulated by the government as to what features are detrimental to driver attention. Frankly, if regulators had their druthers we'd all be driving with hands at 10 and 2, no food, no cupholders, no radio, no talking; just a grim white knuckle drive. Safer definitely, but not likely.
While Ford has been hitting better numbers in China and India, the American motorist has always been the big driver (pun intended) of growth for the big automakers. Now an entire generation is uninterested in the American rite of passage. Most public school systems have been cutting back on drivers' ed courses for several decades.
Hearts and Wallets
Who is likely to win the hearts and wallets of reluctant young drivers? It looks like Toyota Motor (NYSE: TM) is the ride of choice among younger drivers; even its Avalon , generally considered a car for the 'rents (parents) is getting a makeover. It has three modes of drive: eco, sport, and normal. Then Toyota is king of the hybrids, still, with its line of Priuses (Prii?). If the kids have to drive a car on a regular basis they'd rather spend less money on gas.
Of these big automakers, Ford is the lowest on valuation with a 2.52 P/E and a 1.80% yield but it has been trading between $9 and $13 since August 2011. General Motors has a P/E of 9.46 but no yield. Lately, it has become a hedge fund darling and a big value pick for David Einhorn of Greenlight Capital.
Toyota has the highest P/E of 28.37 but a forward P/E of 10.62. It has a yield of 1.70% and is the one of the three trading closest to its 52 week high. In a special Motley Fool report it was pointed out that the only global market where Toyota lags is Europe. Considering that Ford has had to close factories in Europe because of dismal sales numbers Toyota is probably just as glad to cede this market to GM and Ford.
A Rent or Used Generation
This long term trend away from the purchase of cars is also impacted by this generation's move back to cities where post-college jobs are more plentiful and public transportation is available. Retailers like Target have acknowledged this trend and are building citified Targets in larger cities with apartment sized furnishings, etc. Another multi-generational trend to watch is that with job security so rare young people are wary of large possessions that tie them down as they are forced to lead a gypsy life from job to job.
There are two companies that might really benefit from these trends. Zipcar (UNKNOWN: ZIP.DL2), an hourly or daily auto rental service, is for those special occasions when an auto is indispensable for Generations XYZ. For those who are slightly older and need a car but realize it's not an investment that appreciates, CarMax (NYSE: KMX) which sells used cars, is another beneficiary.
Zipcar was just upgraded by Goldman Sachs to a Buy on Nov. 19, calling it a, "high-risk, high-reward contrarian" play. They raised the price target to $8.75. On Black Friday trading the stock hit an intraday high of $8.64. Since it debuted in April 2011 the stock has dropped from $29.27 to a low of $5.90 before the Goldman call. The company operates mostly in metro areas and college campuses in the US, Canada, and the UK.
As for CarMax, the P/E is 19.91 but the stock has risen from the high single digits in 2009 to $36.15 this year. They authorized a $300 million share repurchase to end by December 2013 and they are still expanding, opening between 10-15 superstores every year for the next four years. Currently, they own and operate 113 used car superstores in 56 markets. CarMax advertises no-haggling and that is something this younger generation appreciates as they've already done their research on the internet and the back and forth of negotiation just seems like a waste of time to them (me, too).
Playing the Trend
Maybe you already own some Apple or Google, that would be one way to play the trend of this up and coming generation. This decline in US driver licensing isn't going away. Yes, being able to drive is still a life skill that is necessary for most adults, but buying a car isn't. These young adults see a 10-25 thousand dollar car plus other costs as a luxury if not a burden. They'd just rather text and skype than drive.
Zipcar is definitely a speculative name but these multiyear trends are pointing in their favor and Goldman Sachs agrees. For a slightly less speculative play, CarMax has been a winner for the last three years. Ford is cheap, but it is still exposed to Europe and doesn't have the hybrid popularity of Toyota. Same goes for General Motors. Toyota is a good name as an international play which will likely be affected less by this US trend than the other big automakers.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford and Zipcar. Motley Fool newsletter services recommend Ford, General Motors Company, and Zipcar. 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!