The automotive industry has taken a beating since the financial crisis of 2008. Increasing fuel costs discouraged purchases of pickup trucks and sport utility vehicles, known for their lack of fuel efficiency. Automakers had focused so much on these models because of their popularity and their 15-20% profit margin (compared to 3% or less for cars) that, when consumers wanted fuel-efficient vehicles to balance the rising costs gas, auto makers had little to offer. Sales began to drop and many automakers suffered double-digit percentage declines in sales. (Find out what to consider before taking a ride with stocks from this industry. See Analyzing Auto Stocks.)
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In late 2008, the U.S. government provided controversial bailouts to auto makers General Motors (dubbed Government Motors) and Chrysler to avoid bankruptcy and layoffs. Ford ultimately declined any bailout funds, a move that boosted Ford's reputation and helped the automaker earn new customers. Figure 1 compares six auto stocks; Ford, represented by the blue line, dipped the lowest during 2008-2009, and since has had the most significant rebound.
Figure 1 Compares six auto stocks: Honda Motor Corporation (NYSE:HMC); Daimler (Nasdaq:DDAIF); Toyota Motors (NYSE:TM); General Motors Company (NYSE:GM); Tesla Motors Inc (Nasdaq:TSLA); and Ford Motor Company (NYSE:F). Chart created with Google Finance.
Fall from Grace
Prior to the economic crisis, owning an auto stock was considered a relatively safe bet. General Motors, for example, held an esteemed spot on the Dow Jones list of 30 top U.S. companies since 1925 - until 2009 when it filed for bankruptcy protection, disqualifying GM from being among the 30 Dow components. In addition, GM was delisted from the NYSE as its stock shares fell below the one dollar minimum in mid- 2009. Amid the financial crisis, stock prices for all of the auto manufacturers plunged along with sales, jobs and reputations.
Power of the Underdogs
A powerful Chrysler ad campaign was unveiled during this year's Super Bowl. The ad, featuring famous Detroit-native Eminem, shows a struggling Detroit - and in essence the American auto industry - geared up to make a comeback. Detroit is home to the Big Three, the three major American auto companies - General Motors, Ford and Chrysler - more recently called the Detroit Three. The emphasis on underdog Detroit, a city that has suffered deeply throughout the financial crisis with record unemployment and foreclosures, is intended to exemplify the resiliency of the American people and the auto industry as a whole.
Sales in the U.S. are still struggling against increased fuel costs, vehicle shortages following the March disaster in Japan and reduced incentives. Analysts expect automobile sales in the U.S. to average 12.5 to 13.5 million units for 2011. The first quarter of 2011 saw encouraging sales for most auto makers, with May being the first slump month since last August. June, however, is showing increased demand for cars and trucks as gas prices drop off. Retail sales for new cars are forecast to be around 884,800 units (a 9.9 million annualized rate), an improvement over May's 9.3 million annualized rate.
Good Buy or Good Bye?
Automakers are developing new cars and technology to meet consumer desires and needs. Their new focus on smaller, more fuel-efficient vehicles is a step in the right direction. The fall of GM's Hummer brand proved that Americans no longer feel the need to drive oversized, inefficient vehicles, especially for everyday driving. The higher demand for smaller cars has actually caused vehicle shortages, made worse by the tragedy in Japan. As long as automakers continue to research, develop and manufacture fuel-efficient vehicles, demand for these types of cars should continue to be strong.
The auto industry is perhaps poised to make a slow, steady recovery. Along with that, in theory, stocks for these companies could make a comeback. While auto stocks are no longer a safe bet like they used to be, there is certainly the chance that these companies will continue to recovery from the devastating lows and near-bankruptcies of 2008. (Find the perfect policy that suits both your coverage and budgetary needs. Check out Beginner's Guide To Auto Insurance.)
The Bottom Line
Most stocks have endured tough times since 2008. Many of the huge companies that weathered this economically challenging period showed tenacity, dedication and, in some cases. luck. Some of the automakers have managed to show strong growth over the past three years, evidence that it is possible to climb out of the financial crisis whole. Investors who are interested in automobile stocks will have to consider each company's fundamentals, the current economic climate and their own risk tolerance before choosing to buy and hold any particular stocks.
At the time of publication, Jean Folger did not own stock in any company mentioned in this column.