After two bailouts, soaring gasoline prices, massive recalls and plummeting demand, it's no wonder why the auto industry is one of the markets most hated sectors. However, that hate could be misguided. With the U.S. and global economies beginning to recover, several of major auto makers have seen sales finally rebound. In the emerging world, new found wealth and the rising numbers of the middle class are allowing more people to own cars. While the sector does have its warts, overall that picture could be changing. For those investors seeking value, the automotive industry might be one place to find it.
TUTORIAL: The Industry Handbook: Automobiles
Double Digit Sales Gains
Things may be looking up for the U.S. auto industry. Improving economic conditions and rising consumer sentiment have helped pushed auto sales upwards. Detroit's Big Three posted another month of double digit sales gains in June. The seasonally adjusted rate of sales (SAAR) rose to 11.45 million vehicles, according to Autodata. This was lower than what analysts were estimating, but did show a continued gain for the sector. The data also showed that consumers were shifting towards smaller, more fuel-efficient cars despite the fall in gasoline over the last few weeks. Ford (NYSE:F) has benefited from this trend, seeing a 13.6% increase in its Fiesta, Focus and Fusion models. Analysts are bullish on the automotive sectors promise with consensus estimates suggests a 500,000 unit increase through July. This could finally mean that the U.S. auto industry is back on track. Stocks within the sector could also suggest that. Since its March 2009 lows, the DJ U.S. Automobiles & Parts index ($DJUSAP) is up nearly 350%. (For related reading, see The True Cost Of Owning A Car.)
With the developed world auto sector beginning to show some signs of strength, the emerging world's love affair with cars is just getting started. Industry group Wards Auto estimates that global auto sales will increase by 38% to 107 million units in 2020, up from 77.5 million units in 2011. However, that growth will be primarily driven by emerging market nations. Wards estimates that these countries will see a 62% increase in demand. Auto sales are estimated to increase by 61% in China and a staggering 163% in India. In addition, both BMW AG (OTCBB:BAMXY) and Daimler AG (OTCBB:DDAIF) (the parent of Mercedes Benz) are on track to have record years driven by the emerging market consumer's new taste for luxury vehicles. (For related reading, see New Wheels: Lease Or Buy?)
Starting Your Engines
With sales of automobiles starting to grow here and abroad, investors may want to consider the sector for a portfolio. While there are still some risks for the industry - GM (NYSE:GM) has about six and a half months worth Silverado inventory currently at dealerships, for example - the best days for the global auto industry lie ahead. For those investors wanting to tackle a broad swath of the sector, there are two new ETFs to chose from.
The First Trust NASDAQ Global Auto (Nasdaq:CARZ) follows 32 automakers from nine developed and emerging market countries. That said, the Global X Auto ETF (Nasdaq:VROM) could be the better choice. The fund includes weightings to the automakers, auto parts suppliers and tire companies. Investors gain access to both producers such as Tata Motors (NYSE:TTM) and parts companies like American Axle (NYSE:AXL) and Goodyear (NYSE:GT). This allows investors to play the entire spectrum of the automobile sector, including emerging market demand.
The Commodity Play
Finally, one of the more interesting ways to play global auto demand could lie in the commodity sector. Nearly, 57% and 50% of the world palladium and platinum supplies respectively are used in auto exhaust treatment. It stands to reason that greater auto demand will result in more catalytic converters and greater platinum and palladium demand. The ETFS Physical Platinum Shares (Nasdaq:PPLT) and ETFS Physical Palladium Shares (Nasdaq:PALL) are the easiest ways for investors to bet on rise of these metals. For investors looking more "future forward," the rise of electric vehicles could help those companies associated with the lithium sector. The Global X Lithium ETF (NYSE:LIT) offers a way to play that market.
With sales beginning to return in the developed world and emerging market demand just getting started, the global automobile industry offers a unique portfolio play. While the sector does have some pitfalls, the long term global picture does seem rosy. For investors, using the current weakness in the sector might make sense to add stocks like Federal-Mogul (Nasdaq:FDML) to a portfolio. (For related reading, see Your Car: Fixer-Upper Or Scrap Metal?)
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