Three Stocks to Profit from New and Old Cars Alike
By John Whitefoot for Daily Gains Letter |
Spring is finally here, but that certainly doesn’t mean corporate America will cease to use the cold weather as an excuse for abysmal corporate earnings. Throw a dart at any sector, and you’ll find CEOs blaming the weather in some capacity—well, save for the utilities companies.
One sector that might be able to (on some level) justifiably blame the weather for a weak start to the year is the auto sector. Overall, U.S. auto sales were up eight percent year-over-year, while Canadian auto sales were up four percent. (Source: Isidore, C., “Car sales make a strong comeback in 2013,” CNN Money web site, January 3, 2014.)
In 2013, U.S. auto sales topped 15 million for the first time since 2007. While auto sales of 15.6 million were below the 16.0 million forecast by analysts, it was still an encouraging sign for the auto industry. Ford Motor Company’s U.S. sales were up 11%, while Chrysler Group LLC saw its sales climb by nine percent, and General Motors Company reported a 7.3% increase.
The 2013 auto sales data is encouraging in light of the disappointing December sales numbers; this also happened to coincide with the start of the dastardly winter of 2014. The weak end-of-the-year auto sales sentiment skidded over into 2014. Auto sales missed both their January and February expectations.
So far, 2014 has been good for global auto sales. Global sales hit record territory in February, climbing seven percent year-over-year. Auto sales in China climbed 22%, while car sales in Western Europe climbed year-over-year for the sixth consecutive month. Spain led the way with an 18% jump in auto sales. (Source: “Record Global Sales And Production In Early 2014 – North American Output Schedules Point To Further Gains,” The Bank of Nova Scotia web site, March 20, 2014.)
In 2014, both U.S. and North American auto sales are expected to climb three percent year-over-year. Global auto sales are forecast to increase 5.2% year-over-year in 2014.
Economists noted that the solid auto sales numbers have come on the heels of an improving economy—though I think it would be a mistake to overlook the car loans the Detroit automakers are dangling from their rearview mirrors.
First off, even though the U.S. unemployment rate has dipped to 6.7%, the fact remains that most of the new jobs are in the low-paying retail sector—not a great foundation on which to build sustained economic growth.
Car loans on the other hand…
Not unlike the pre-bubble U.S. housing industry, credit is easy to get—even for borrowers with…wait for it…low credit scores. Thanks to lower interest rates, borrowers of every ilk have been taking on increasing amounts of auto loan debt for roughly three straight years. At the end of 2013, the average auto loan balance was $16,769; in early 2010, auto loan debt hit a low point of $14,734. (Source: Fontinelle, A., “Americans Are Borrowing More To Buy Cars – But Should They Be?” Investopedia web site, March 19, 2014.)
Aside from 2013 being a record year for North American auto sales, the average age of a North American car still on the road also hit a record-high of 11.4 years. For investors, it might be time to take a second look at auto parts companies.
Three great places to start include BorgWarner Inc. (NYSE/BWA), Linamar Corporation (TSX/LNR), and Magna International Inc. (NYSE/MGA, TSX/MG). The following chart includes these three auto parts companies, along with the Dow Jones U.S. Auto Parts index.
Chart courtesy of www.StockCharts.com
Tags: auto sales, corporate earnings, Detroit, Dow Jones, economic growth, interest rates, retail sector, unemployment rate