Is The Auto Industry On The Rebound?

By Tim Parker | December 18, 2011 AAA

It might be a whole lot of hype over something relatively insignificant, but investors who follow the auto industry are pointing to a recent announcement from Ford Motor Co. (NYSE:F) as a sign that the auto industry is recovering from what once appeared to be the beginning of the end for Detroit. (For related reading, see Analyzing Auto Stocks.)

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Was it Always This Bad?
In the 20th century, if you wanted a car, you bought from the Big Three. Ford, GM (NYSE:GM) and Chrysler dominated the auto industry. The automobile was the symbol of American manufacturing and everybody was proud to drive an American car. Then, in the final years of the 20th century, the auto industry began to show signs of fracture and that had people worried.

The Big Three were looking more like banks than auto makers. GM hired Rick Wagoner, who had economics degrees from prestigious schools but no experience in the automobile industry. He focused more on the financing arm of GM, allowing the quality of their cars to suffer. During that time, foreign manufacturers exported high quality vehicles to the United States, allowing the U.S. to silently lose its distinction as the most respected nation for automobile manufacturers.

GM's stock price went from $60 per share to as low as $1.45 under Wagoner's watch and Ford and Chrysler followed. A report by The Heritage Foundation concluded that in 2006, automakers were spending, on average, over $70 per hour on each employee compared to an average of $23 in the rest of the private sector workforce.

When the 2008 financial crisis hit, GM and Chrysler were unable to meet such high overhead costs and needed government support. Now, as the Big Three get back to the basics and focus on their product, the sense of pride in the American auto industry is beginning to rekindle.

On Dec. 8, 2011, Ford announced that after five years of paying no dividend, they were reinstating a dividend of 5 cents per share. While hardly a hefty payday for investors, it may signal that Ford, the one company of the big three automakers who didn't receive a government bailout, may finally be seeing bluer skies on the horizon.

Only costing Ford just under $200 million, the dividend may be largely symbolic. When the dividend was canceled in 2006, CEO Alan Mulally said, "We need to fix our balance sheet. Once that happens, we will bring the dividend back." Now, Ford is signaling to investors that the company is much more healthy than it once was. What does this say about the auto industry as a whole? Are all of the automakers seeing positive signs? (To learn about Ford Motor history, read Henry Ford: Industry Mogul And Industrial Innovator.)

Year-Over-Year Sales
If you only look at the November sales reports, the answer is yes. In November, Chrysler's sales were up 44.5% from November of 2010. Volkswagen (OTCBB:VLKAY) was up 40.7%, Nissan (OTCBB:NSANY) saw 19.4% gain from the previous year, Ford, 13.2% and GM saw gains of 6.9%. This represents a total sales rate of $13.63 million, the highest since Cash for Clunkers in 2009.

Why such demand? According to Ford, much of the demand is coming from a slightly improving economy and pent up demand. With the average vehicle age at 10.6 years, consumers are purchasing out of necessity. Purchasing a new car when your current vehicle is only a few years may be considered luxury spending but when it becomes so old that the cost to repair it outweighs the cost to buy a new car, it becomes a necessary purchase. (For related reading, see Car Shopping: New Or Used?)

What About Electric?
While not as bad as Honda, who saw year-over-year sales decline 10.1%, GM still can't find solid footing. What they were hoping would be the future of automobiles, their hybrid Chevy Volt hasn't seen the demand that GM had hoped for. In addition, recent safety concerns have caused the $32,000 hybrid to attract negative attention at a time when GM is trying to be the auto company of tomorrow.

But this may not be a problem with Chevy. Tesla Motors (Nasdaq:TSLA), a startup that represents the future of the auto industry in the eyes of investors, has seen their stock price rise more than 10% year-to-date while the industry as a whole has seen declines of more than 30%. Recently, Tesla was downgraded by Morgan Stanley because they believe that the demand for electric vehicles will be much lower through 2025 than previously believed. Analysts predict that hybrid and natural gas vehicles will be the future of the auto industry, but for now, consumers are slow to embrace them.

The Bottom Line
When the big three automakers were nearly bankrupt, they got a lot of criticism about their lack of innovation, but as the American auto industry shows real signs of recovery, it is clear that the gas guzzling cars of yesterday are still the vehicles of choice for many. Americans don't appear to want innovation as much as previously thought. At least not yet. (To learn more, read 9 Cars That Can Rebuild The American Auto Industry.)

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At the time of writing, Tim Parker did not own shares in any of the companies mentioned in this article.

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