For investors, the global recession certainly put the U.S. automotive industry in reverse. Bankruptcies, government sponsored bail-outs, soaring gasoline prices and plummeting demand set shock waves through the sector. Many had feared that Detroit would never be the same and that the U.S. automotive industry would be “dead money” walking.
Well it seems like naysayers have been dead wrong.
Detroit recently racked up one of its best performances in nearly twenty years. Offering new freshly stocked showrooms of cars and more fuel efficient trucks, American car makers are coming back with a vengeance. For investors, the time could be right to bet on the automotive sector.
Gaining Market Share
Things may be looking up for the U.S. auto industry. Improving economic conditions and rising consumer confidence have helped push auto sales upwards. So much so, that several big U.S. automakers have experienced something not seen in more than 20 years -- gains in market share.
Buoyed by strong vehicles across all market segments, the trio of beleaguered General Motors (NYSE:GM), Ford (NYSE:F) and Chrysler all gained market share from their international rivals in the first quarter. According to sector researcher Autodata Corp, combined market share for GM, Ford and Chrysler rose to 46.2% so far this year. That’s up from 44.7% a year earlier.
Meanwhile, the trio continues to see furthered growing sales as credit availability- including zero-down loans- has improved. As a result, Ford sales rose 18% last month, while GM and Chrysler both increased by 11%. This surge has helped push the industry to its best April since 2007.
However, the good times for the U.S. auto industry will keep coming.
Pent up demand from buyers driving older cars will add extra juice to vehicle sales. The average age of a car in the U.S. has grown to 11.1 years, while the average truck is 10.4 years old. Analysts estimate that those old vehicles will soon need to be replaced, and leading those replacements will be pick-up sales. As farmers and blue-collar workers replace their old trucks -which are more tools than toys- sales of pickups have risen about 20% this year. More importantly, analysts estimate that each big truck hauls in $8,000 to $10,000 in gross profit.
Betting On An Automotive Resurgence
With the U.S. automakers finally turning a real corner, investors may want to give them a go. The First Trust NASDAQ Global Auto Index (NASDAQ:CARZ) offers broad exposure to the three firms with Ford, GM and Fiat (OTCBB:FIATY) –Chrysler’s parent- holding at just over 15% of assets. However, the fund barley trades at all despite being the only automotive tracking fund available. Luckily, there are other ways to get your car fix.
One prime example is dealership stock AutoNation (NYSE:AN). The company is the largest of the auto retailers with 262 new vehicle franchises in 15 states. That sheer size allows it tap a variety of markets and AutoNation recently reported a 10% year-over-year increase in retail new vehicle sales to 22,515 units during this past April. More importantly, that rise was attributable to strong sales in the Domestic segment which saw sales jump 20% to 7,588 vehicles. Already, AN has seen rising earnings due to the increase in sales. Any continued good news could have its surpassing rivals like Penske (NYSE:PAG) and CarMax (NYSE:KMX).
Another interesting automotive bet could be the firms that supply axels, drive shafts and various other structural components to global automakers. The leader of the pack could be Magna International (NYSE:MGA). The Canadian firm recently reported an increase in its full-year sales forecasts after posting a huge profits and a 9% rise in revenue during in the first quarter. Like AutoNation, Magna credited the return of the Big Three automakers as the main reason for the earnings beat and expanded profits. For investors looking for Magna-like potential, both American Axle & Manufacturing (NYSE:AXL) and Federal-Mogul (NASDAQ:FDML) could see similar long term gains as the U.S. auto market roars ahead.
The Bottom Line
It seems that the U.S. auto industry is finally back. The combination of newly revamped product line-ups along with rising consumer confidence has the Big Three automakers seeing green. For investors, betting on the sector could also lead to plenty of profits as well. The previous picks, along with turnaround plays like Dana (NYSE:DAN), make ideal selections in playing the trend.
At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.