Car Sales at Highest Level Since 2007

Is This a Good Time to Buy Auto Stocks?

Car Sales at Highest Level Since 2007
July 29, 2014

You know we Americans love our cars when General Motors (NYSE:GM) — which has been buffeted by historically high recalls, a Congressional investigation, and over 30 wrongful-death lawsuits — is enjoying record sales. In May 2014, GM sales hit 284,694 vehicles, up over 13% from the previous May. Toyota (NYSE:TM), Nissan (NASDAQ:NSANY), and Chrysler (owned by Fiat S.p.A. (OTC:FIATY)) all had sales growth in the double-digits, and Ford (NYSE:F) had its best May sales volume in ten years.

Given this remarkable growth spurt, it this a good time to buy auto stocks or has the opportunity passed you by like a speed yellow Corvette leaving you in the dust?

Since auto companies were hit hard during the great recession (total U.S. auto sales bottomed out in February 2009 at 9.17 million vehicles), sales have been steadily on the rise, finally reaching 2007 sales levels in May of this year. Given the depth of pent-up demand and the number of older cars on the road, this trend seems likely to continue – as long as the economy does not sink again.

Auto sales tend to track the broader economic picture, which has shown brighter signs after the dismal, weather-impaired first quarter of 2014. While economic growth is still middling at around 2%, interest rates remain low, and banks are offering favorable loan terms. There is some concern about slow wage growth and job growth – but as long as even slow growth continues, auto stocks may very well follow.

If you were in a buying mood, which auto stocks should you consider? The following should not be construed as a recommendation to buy – you should research any auto stock you want to acquire in detail – but as two intriguing possibilities.

  • GM – Believe it or not, analysts appear to be bullish on GM, even with all of the recall issues. The feeling seems to be that the worst has been dealt with, and so far, sales results suggest consumers are not shying away from GM products. The perception is that new CEO Mary Barra has taken the necessary steps to put GM back on track.

  • Tesla (NASDAQ:TSLA) – Tesla appears to be turning the corner on being thought of as a true competitor to the major manufacturers. They turned their first profit in 2013 and are making significant strides in refueling infrastructure to make their Model S the first truly practical all-electric vehicle for long trips.

Automobile stocks encompass more than just the car manufacturers. There are a huge number of dependent companies throughout the supply chain, as well as dealership and distribution companies to consider.

Zack’s Investment Research recommends three auto stocks in the support industry, all based on low P/E (price-to-earnings) and P/B (price-to-book) ratios compared to their industry rivals.

  • Cooper Tire (NYSE:CTB) – The fourth largest North American tire manufacturer, Cooper has a return on equity (ROE) of over 9%.

  • Standard Motor Products (NYSE:SMP) – This manufacturer and distributor of replacement parts has a projected 10.6% long-term growth rate.

  • Magna International (NYSE:MGA) – A relatively diverse automotive component manufacturer and supplier, they also do significant OEM work ranging from designing components and modules to complete vehicle assembly. Their long-term growth rate is projected to be around 11.6%.

At some point, the pent-up demand will be filled and sales should begin to level off – but in the relatively short-term, auto stocks are likely to continue growth from both the auto manufacturer side and the support side as long as economic growth continues. Research the companies you find the most interesting and invest accordingly – but keep a wary eye on the overall economy.

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