Major Automaker Sales Driven by Credit Expansion

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Ford (NYSE: F) expects to touch 2.2 million in U.S. sales in 2012 on the back of its popular compact models. The business will be selling a record breaking more than two million cars for the second year in a row, which will make Ford the only car manufacturer, besides General Motors (NYSE: GM), to sell more than two million units in the U.S market. Total car sales in November increased by 15.2% over the last year to 55,661 units while light truck sales increased 2.8% to 121,431. In the first nine months of 2012, more than 700,000 Ford Focuses were registered, which puts it in sight of being the best-selling car in the world.  Ford’s success is a mirror of the rest of the industry which is benefitting from renewed credit growth.

However, Ford’s exposure to Europe remains a concern. It is overhauling its European operations and has planned four plant closures with 6,200 job cuts; it will trim its European capacity by 18%, which should save the company up to $500 million each year. By mid-2013, Ford will completely wrap up its British manufacturing by closing the Dagenham and Southampton facilities. Its massive Belgium plant located in Genk will also be closed by the end of 2014. The demand for cars in Europe is expected to remain around 14 million in 2013, which means that the continent’s production capacity is around 9 million more than its demand.  In 2011, Ford lost $27 million in Europe, which is expected to balloon up to $1.5 billion for 2012 and another $1.5 billion in 2013. 

The company is making strategic moves that will reduce its European losses starting from 2014 and in doing so will become more efficient.  CEO Alan Mulally, who successfully steered the company from a nearing bankruptcy during the global financial crisis, is going to stick around until then. Mulally has turned out to be an extremely successful leader for Ford under whose guidance the company’s stock has risen from $1.43 in November to the present $12.95 (more than an 800% increase ), which is above the pre-financial crisis level of $8–$9 in 2007. 

In the last six months, the company’s stock has been up an impressive 35%, which is significantly higher than both the SPDR S&P 500 ETF and the SPDR Dow Jones Industrial Average ETF, which are up 4.6% and 1.8% in the same period.  General Motors has outperformed even Ford by rising as much as 46.2% in the last six months. Their stories are nearly identical; weakness in Europe has been offset by strong domestic demand.  The question will be for 2013 whether the U.S. car market will be as robust, as a number of factors coincided in 2012 to boost booked sales figures: an average fleet age ballooning out to past 10 years, a presidential election, inventory shenanigans, and supply disruptions early on from Toyota (NYSE: TM) and Honda (NYSE: HMC). While Ford’s vehicle sales from the beginning of January till the end of November have increased by 5% in 2012 from 2011, GM has posted an increase of 3.5% in the same period. The company has sold 2.269 million vehicles during this period.

However, their biggest Japanese rivals Honda and Toyota are also cashing in on the strong U.S demand and have been taking back market share lost to Ford and GM due to 2011’s natural disasters. As is shown in the picture below, the market share of both Ford and GM dropped in the first eleven months from 2011 till 2012, while that of Toyota and Honda has risen. In fact, Toyota, despite all of its woes related to manufacturing faults that have resulted in massive recalls, lawsuits and the like, is quickly rising and is just 1.1 percentage points behind Ford as biggest player in the American market in vehicles sold. Until Nov. 12, Toyota had sold 1.88 million vehicles while Honda had sold 1.29 million in the U.S. Both have recorded an increase of more than 23%, which dwarves the increase reported by GM and Ford. 

Car sales are extremely interest rate dependent.  But, with interest rates already at zero, the Fed is attempting to drive real rates even more negative in 2013.  If they are successful in creating greater money velocity along with pushing the M1 money multiplier back over 1 for the first time in four years, then car sales will continue to be strong.  Given that 2012 saw the beginnings of a new credit inflation cycle being created by the Federal Reserve (see charts here and here), the odds are pretty high that this is what will occur in 2013.  The danger in this policy is that it does not work and only produces a loss of confidence in the currency, and chaos is unleashed.  If you believe that is a high probability then auto stocks are not for you.  But if you bet on stability and a continuation of the modern Prisoner’s Dilemma of the current monetary regime then betting on a continuation of the next potential automobile bubble is a good one.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>F</strong></p> </td> <td> <p><strong>GM</strong></p> </td> <td> <p><strong>TM</strong></p> </td> <td> <p><strong>HMC</strong></p> </td> </tr> <tr> <td> <p><strong>Stock 6m</strong></p> </td> <td> <p><strong>+35.03%</strong></p> </td> <td> <p><strong>+46.20%</strong></p> </td> <td> <p><strong>+15.86%</strong></p> </td> <td> <p><strong>+6.70%</strong></p> </td> </tr> <tr> <td> <p><strong>Beta</strong></p> </td> <td> <p>1.51</p> </td> <td> <p>1.79</p> </td> <td> <p>0.77</p> </td> <td> <p>1.07</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>2.94</p> </td> <td> <p>10.82</p> </td> <td> <p>15.45</p> </td> <td> <p>15.73</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>4.41</p> </td> <td> <p>2.66</p> </td> <td> <p>6.04</p> </td> <td> <p>2.35</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>1.50%</p> </td> <td> <p>N/A</p> </td> <td> <p>1.50%</p> </td> <td> <p>2.60%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>2.46%</p> </td> <td> <p>2.90%</p> </td> <td> <p>2.88%</p> </td> <td> <p>2.43%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>140.16%</p> </td> <td> <p>13.26%</p> </td> <td> <p>7.96%</p> </td> <td> <p>7.88%</p> </td> </tr> </tbody> </table>

PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors Company. 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!

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