Positive Signs For the Auto Industry
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I know that it's hard to believe, but investors are being given multiple signs that a particular industry should outperform in the future. I've written about this before, and now CNBC's own Phil LeBeau has given investors yet another chance to capitalize on a clear trend. That trend is the upcoming boom in auto sales.
The CNBC article specifically mentioned there are about 245 million vehicles in the United States with an average age of 11 years according to Experian. In addition, 52 million of these cars and trucks are 16 years or older. As the article says, part of this lengthening in the average age of vehicles has to do with the recession and slow recovery, but vehicles cannot stay on the road forever. In particular, these 52 million cars and trucks that are over 16 years old, are likely going to reach a point where the cost to repair them is not going to make sense. The article also noted that cars and trucks are built to run longer and this certainly is a contributing factor. If the economy slowly recovers, as individuals and families become more comfortable with their economic situation, many will apparently need to replace their vehicle. For investors, the question is who should benefit the most?
The number one brand that should benefit is Ford (NYSE: F). The reason for this is, of the top four brands operating in the U.S., Ford claims the number one position with 17.2%. This isn't a huge surprise considering that the F-150 has been the top-selling truck for over 30 years. Ford is in a unique position, as the company is now paying a dividend with a 2.2% current yield, and the company is expected to see significant EPS growth in the next few years. In fact, analysts expect Ford to grow EPS by nearly 19% between 2012 and 2013. With the company cutting expenses and improving quality, investors should consider Ford as one of their top ideas to play this automotive recovery.
Coming in second place, is General Motors (NYSE: GM) with the companies Chevrolet brand commanding 15.8% of the vehicles operating in the U.S. Most people are aware of the General Motors story, and on the surface the numbers look very good. The company currently sells for a P/E ratio of just 6.03, and with over 14% growth expected in the next several years, this seems like a bargain. In addition, analysts are calling for nearly 29% growth in EPS next year. The huge difference between General Motors and Ford is, the fact that General Motors is still around 30% owned by the US government. As long as the government is involved, there is a massive share overhang that current investors need to be wary of. Though the company should benefit from the coming boom in auto and truck sales, I fear this overhang of shares that will need to be sold, will cap the amount of growth that investors can expect from the stock.
The third most operated brand of vehicle in the U.S. is made by Toyota (NYSE: TM). This company, like its counterpart Honda (NYSE: HMC), is expected to see huge earnings growth in the next few years due to a recovery in their operations. With natural disasters overseas causing supply disruptions, both companies are coming out of a more difficult time than they have had in quite a while. In addition, it seems these two foreign auto producers were caught off guard by the quality improvements at Ford, and to a lesser extent General Motors. Toyota in particular is expected to see over 34% EPS growth over the next several years. With the stock paying a dividend of 1.3%, and a long storied history of quality, as customers return to car showrooms Toyota should benefit directly.
Honda will also benefit from the average age of American cars and trucks increasing. With 7.3% of the total vehicles in the U.S., Honda has a long history of vehicle quality as well. This company is expected to see over 34% EPS growth in the next few years. With a 2.2% dividend yield, the company is a slightly better income producing investment than its foreign counterpart. Honda's biggest challenge will be the fact that Toyota is sure to be aggressive in trying to recapture lost market share.
No matter which company investors choose, there's no question that the new car industry is set up to allow investors to profit from future demand. Existing vehicles on the road are at the oldest average age in recent studies. With over 50 million cars and trucks running particularly long in the tooth, even the better build quality of the last several years, can't escape that Americans will need to replace these vehicles. With used car prices very close to new car pricing, it's likely that consumers will increasingly choose a new vehicle. Given the tremendous dip in demand during the Great Recession, the pent up need for vehicle sales has been built over the last 5 years. Traditionally speaking, as used-car pricing rises, and pent up demand rises, new vehicle sales benefit. While there will be the short term events like recalls and quality issues, these top four brands should benefit the most as new auto sales pick up.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Ford. Motley Fool newsletter services recommend Ford and General Motors Company. 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.If you have questions about this post or the Fool’s blog network, click here for information.