The auto industry has been having an outsized impact on the U.S. economy lately. Consider this:
- In November, Americans turned out in record numbers to buy new cars: Car sales jumped to a four-year high.
- In October, businesses’ stockpiles grew thanks to the auto dealers, who expanded their inventories by 0.9%.
- In November, core wholesale prices (excluding food and energy) rose 0.1% on higher automobile prices.
- In November, core prices also rose 0.1% at the consumer level thanks to a jump in new vehicle prices.
What we’re seeing is that more Americans are buying new cars, plain and simply. Interestingly enough, new car prices have risen 1.4% over the past year to match higher demand while used car prices have slumped 2.3%. And this newfound strength isn’t isolated to the U.S.; in Asia, car sales are hitting the gas thanks to incentives provided by the Japanese government. So for the first time ever, this year over 80 million vehicles will be sold around the world!
This is obviously tremendous news for the world’s largest automakers. However, is this enough to change my long-time stance to steer clear of car stocks? Let’s see how these companies are doing in terms of fundamentals and buying pressure:
As you can see, not all car makers have been given the green light. In fact, of the four main automakers, only Toyota Motor Corp. (TM) has what it takes to be a buy in this market. As I mentioned earlier, the Japanese government has been propping up the auto market in the wake of the 2011 tsunami, and this helped drive Toyota to selling a record 7.4 million cars and trucks during the first three quarters of 2012. By comparison, General Motors Co. (GM) sold just 6.95 million units, so it looks like Toyota could very well usurp GM’s title as the world’s biggest automaker.
Now, Toyota has also made headlines today after it was slammed with a $17.4 million fine from the U.S. government—a record for safety fines—but given its earnings prospects I expect to keep TM at a buy. The fact is that Toyota’s bottom-line is expected to surge 309% this quarter (compared with the same quarter last year). And given Toyota’s track record of hefty earnings surprises (the company has topped the consensus estimate by at least 16.8% for three of the past four quarters) we could see even stronger results when Toyota announces earnings at the beginning of February.
As we transition to 2013 and all of the changes the New Year will bring, I’ll keep my eye out for new profit opportunities and red flags. In the meantime, we have the latest estimate for third-quarter GDP coming out on Thursday, so you can expect an update on the U.S. economy later this week.