Are Automakers Getting In Gear?

By Greg Sushinsky | November 13, 2009 AAA

Toyota Motor Co. (NYSE: TM) reported encouraging earnings of 7 cents a share (net income of $232 million) last week for its second quarter, which beat analyst estimates of a $275 million loss by a wide margin. This was an 84% dip in net profit from $1.49 billion, or 47 cents a share last year, with revenue down to $50 billion from $55 billion in last year's same quarter, but the company slashed its projected loss for the fiscal year to $2.2 billion from $5 billion. Despite the profit dip, the report showed signs of Toyota reversing its profit direction after a harsh year.

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Ford's Surprise
Last week Ford (NYSE:F), which avoided the fate of bankruptcy unlike its American rivals Chrysler and General Motors, turned in a nearly $1 billion profit in its third quarter. The $997 million net income, despite an $800 million drop in revenue, came along with positive news by Ford of predicted profitability in 2011. New products and vigorous cost-cutting along with aggressive pursuit of market share as well as Cash For Clunkers were all contributing factors.

Nissan Motors (OTC:NSANY) recently posted a quarterly profit of $922 million, which was 25% lower than last year's July-September quarter, but the company changed its year-long forecast to project a profit of $1.3 billion instead of the $1.1 billion loss it had earlier projected.

Japan's other major automaker, Honda Motor Co. (NYSE:HMC), meanwhile reported U.S. October sales off by 0.4%, with U.S. car sales falling 3.7% but U.S. truck sales rising 4.5%. German automaker Daimler AG (NYSE:DAI), on the other hand, showed a 9% sales increase in the U.S. in October. So whether it was Cash For Clunkers or a more substantive move, many of the automakers are finding at least an easing of the horrendous sales climate of the past year.

What's Ahead
The question most observers are asking is whether the improvement in the auto industry's sales picture is a sustainable one. Have sales merely been boosted temporarily by Cash For Clunkers, which may have simply brought in future sales early? Time will tell as the economy continues to emerge from recession at its own speed, but there are at least encouraging signs in the auto industry.

Ford has re-tooled its product line and has aggressively developed new brands which the company sees as strong growth products long term. GM and even Chrysler have necessarily tightened their operations post-bankruptcy, and will continue, particularly in Chrysler's case, to implement major changes in operations. The Japanese automakers are also cutting costs and responding, albeit slowly, to the new market realities. Daimler seems to be sitting comfortably in its luxury market, an upscale niche that is rebounding if recent Mercedes-Benz sales are any indication.

Cautions
There are at least yellow lights ahead. While most of the companies feel their improvements are not solely due to Cash For Clunkers, they also are uneasy about the uncertainty of the consumer and the economic recovery. The sales improvements are, thus far, encouraging but have not yet proved lasting. Continued work on product lines, finances and operations will be crucial. No one is predicting a return of the overall global auto sales figures to pre-recession levels anytime in the near future. Added to this, the revived health of many of these companies, along with other solid competitors such as Hyundai and Volkswagen, make the battle for the tighter market that much tougher.

Long-term investors need to monitor the ongoing progress and performance of the auto stocks as potential investments very closely and carefully. The bright side is that at least the automakers are no longer going in reverse. They may not be in drive yet or first gear, but maybe they're out of reverse and have shifted into neutral. (To learn more, read Analyzing Auto Stocks.)

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