Is the American Auto Renaissance Over?

Sam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since emerging from the financial crisis, American automobile manufacturers have staged a remarkable comeback. Domestic automakers have apparently changed their way of doing business, altering their strategies and delivering better product. But now, signs are beginning to emerge that this revival might be short lived. What does this mean for Ford (NYSE: F) and General Motors (NYSE: GM) shareholders?

American car quality has declined

Consumer Reports released their annual auto brand rankings on Tuesday. American cars didn’t fare so well.

Of the overall brands, the bottom five were all American -- Ford and its luxury brand Lincoln; Chrysler and its Dodge and Jeep offshoots. And when it came to individual car models, not a single one in the top 10 was American-made, something that hasn’t happened since 2007.

(Chrysler is no longer publicly traded, but investors who want to play the stock could look at shares of its Italian owner Fiat, which trades over-the-counter.)

In an interview on Fox Business, Consumer Reports’ Managing Editor Jon Linkov blamed the poor rankings on the companies trying to do too much. Referring to Ford, Linkov remarked that “they just don’t do everything perfectly.... They are so big that they are spending their money across such a wide range of vehicles.”

Japanese competition stepping up

As much as Consumer Reports doesn’t care for American cars, it strongly favors their Japanese competitors. While its five worst brands were American dominated, its top five best brands were all Japanese: Toyota (NYSE: TM) (and its luxury brand Lexus), Mazda, Subaru and Honda’s (NYSE: HMC) luxury brand Acura.

Individual cars, too, were Japanese dominated. The top midsize went to Honda’s Accord; the best sports car went to the Subaru BRZ and Scion FR-S (a joint project between Subaru and Toyota); the top “green” car went to Toyota’s Prius; the best midsized SUV was taken by Toyota’s Highlander; and Honda won best small SUV and best minivan with its CR-V and Odyssey models, respectively.

And while Japanese automakers appear to be leading in terms of quality rankings, they are also receiving currency support. As I noted in a previous article, Japan’s new Prime Minister Shinzo Abe has pushed his country’s central bank to weaken the yen.

The yen has fallen over 10% against the U.S. dollar since mid-December. With a cheaper yen, Japan’s exports -- including its automobiles -- appear cheaper to non-Japanese consumers.

Hedge funds still like General Motors

As of the last round of 13F filings, several notable hedge fund managers had stakes in GM. By their nature, 13Fs are outdated, as they only reveal the stakes of funds at particular date -- in this case Dec. 31.

At any rate, two titans of the investment industry -- Warren Buffett and David Einhorn -- liked GM back in December. They probably still like it now, particularly Buffett, who has a habit of holding his investments for long periods of time.

As for Einhorn, he argued the bull case for GM back at the October 2012 Value Investing Congress. Einhorn’s argument centered around a reborn GM, with lower costs and manageable pension expenses.

Assuming that they didn’t sell in the last few weeks, Buffett holds 25 million shares of GM; Einhorn holds just a bit more than 21 million.

Should investors sell?

Consumer Reports certainly isn’t the gospel -- its rankings don’t dictate sales trends. But shareholders should carefully consider the possibility that the domestic car companies could be going back to their old ways.

There’s also the issue of currency, which should favor Japanese companies over American ones if the yen continues to trade lower against the dollar.

Yet, on the other hand, big names like Einhorn and Buffett still back GM. Further, the average car on the road is over a decade old, indicating that all car companies should see stable demand if for no other reason than required replacement.

American car companies may not have been the flashiest investment over the last few years, but they’ve posted solid returns. Ford shares have more than tripled since the March 2009 lows, while GM shares are up over 40% since July. Will this continue into the future? Only time may tell.


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