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May 26 2008 | Filed Under Economics , Options , Retirement , Stocks
Automobile companies have been a staple in American society since the early
1900s. For nearly the same amount of time, investors have been trying to
determine the best ways to go about analyzing the industry, individual
companies and stocks - above and beyond the good old-fashioned P/E ratio. The
following article will detail some of the items that can have a positive or
adverse impact on the earnings and stock prices of domestic automakers.
Jobs and Unemployment Play a Role
To qualify for financing to purchase an automobile, individuals must typically
show some source of income. By extension, jobs and unemployment rates can have
an influence on car sales. According to Reuters and Left Lane News, December
2007 unemployment ticked up in numerous states over 2007 and auto sales
simultaneously slumped. The number of jobs and the average person's confidence
that they'll keep their job can both be a big determinant of auto sales. (For
more on the auto industry, read The Industry Handbook - The Automobile
Industry.)
Borrowing Rates
Many car buyers finance their purchases. If the borrowing rates become too
high, buyers may shy away and instead spend more money maintaining their
existing vehicles.
Over time, auto sales data and rate data have shown a correlation. The one
period that stands out is how borrowing rates impacted sales after September
11, 2001.
In November 2001, many employers initiated a hiring freeze, mostly as a
defensive mechanism against a slowing economy. According to the U.S. department
of labor, unemployment rose, but domestic auto sales continued to rise at a
fairly brisk rate according to CNN Money. Why was that? Many give credit to the
fact that a large number of dealers and automakers were offering 0% financing
or other favorable financing packages in order to lure in customers. (For
related reading, see Pros And Cons of Leasing Vs Buying A Vehicle.)
In short, when analyzing and investing in auto stocks don't forget to factor in
the potential impact of interest rate fluctuations and their possible impact on
sales. (To learn more about interest rates, see Forces Behind Interest Rates.)
Labor Relations
U.S. automakers often have a disadvantage compared to their foreign
counterparts. This is because a sizable portion of the U.S. labor force working
in the automobile industry is unionized or under some form of union influence.
Unfortunately, today's unions don't just bargain for safe working conditions as
they did in decades past. These days, they aggressively negotiate for pay
raises, medical and retirement benefits.
This is not to say that these individuals don't deserve the pay they are
getting. In fact, given the hard work many of these individuals perform, it may
be warranted. However, it can be expensive. In order to cover those expenses,
the domestic automaker may have to reduce costs on production or raise the
price of their cars. Both of these options can have an impact on sales.
Look for companies that have just negotiated a contract with their unions. This
way, it is likely that it will be at least a couple more years before the two
parties have to negotiate another contract that could crimp margins.
Tax Breaks
The average American saves very little each year. By definition, this means
that when they get their hands on something like a tax refund, or if they
experience some other type of tax windfall, they probably will spend it.
According to the National Bureau of Economic Research, in 2001, when the
domestic economy entered into a recession, the U.S. government sent out rebate
checks ranging from $300 to $600 as a stimulus, and within a six-month period
most Americans had spent the money. (For related reading, see Recession-Proof
Your Portfolio and Recession: What Does It Mean To Investors?)
The money was spent on a variety of items ranging from more traditional
consumer goods to vacations. However, some of that money almost surely made its
way to the automakers, again as evidenced by the above-mentioned 2001 U.S. auto
sales numbers.
Environmentally Friendly Cars
While there are some exceptions, the majority of automobiles still run on oil
byproducts, such as gasoline. The good news is that this is beginning to
change. For example, battery operated cars and/or hybrids are becoming more
popular. In addition, the government has been pushing automakers to produce
more fuel-efficient vehicles, mostly to help cut down on emissions.
It's important to note that these efforts don't come cheap. In fact, the
research and development (R&D) of such vehicles is likely to cost billions of
dollars and take years to come to fruition. Keep a close eye on what companies
are spending on R&D for environmentally friendly vehicles and try to determine
how that might impact future profits, or how the company will be able to
finance such initiatives. Much of this information will be available in the
company's 10-K and most likely in the management discussion and analysis(MD&A)
section or the section on future guidance. (For insight on fuel efficiency,
read Hybrids: Financial Friends Or Foes? and Getting A Grip On The Cost Of
Gas.)
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New Model Line Up
If a company doesn't have an exciting product line, its sales could suffer and/
or the stock could too. For example, between 2001 and 2008 Ford (NYSE:F) stock
has been in the doldrums. There are lots of potential reasons for its decline,
including potential labor concerns and the health of the U.S. economy. However,
its generally lackluster lineup of new cars has been blamed as well. Automakers
including Honda (NYSE:HMC), Hyundai, Toyota (NYSE:TM), and others have been
coming out with aesthetically pleasing new vehicles. And some folks have found
these more attractive than Ford's offerings.
Try to keep an eye on a company's new cars and try to determine whether you
think their models will appeal to consumers. Remember: the analyst community
will likely be doing the same thing.
Tariffs
When the economy is struggling, some politicians will push for tariffs or taxes
on imported vehicles. They argue that imports will then cost more to buy and
that American jobs will be preserved because consumers will buy "American."
Trouble is, this doesn't always work out as planned. Foreign governments may
then enact tariffs on goods, such as cars that they import and as a result the
domestic automaker may actually end up generating less revenue.
When politicians start to bandy such legislation, read the proposal carefully
and try to evaluate the potential impact on U.S. consumers as well as how other
nations might react. (To learn more about globalization, read What Is The World
Trade Organization?)
Bottom Line
Investing in auto stocks isn't easy. There are a number of macroeconomic and
company-specific factors that must be considered. Investing in these companies
often requires an extra level of patience and dedication, but the industry has
proved it will be around for a long time.