Top Gear: Which Automakers Make The Cut?

The auto industry has been having an outsized impact on the U.S. economy lately. Consider this:

  • In August, Americans turned out in record numbers to buy new cars: Car sales jumped 17% year-over-year to 1.5 million Vehicles. This puts the annual rate at 16.09 million vehicles sold—the highest since the recession.
  • In July, businesses’ stockpiles grew thanks to the auto dealers, who expanded their inventories by 0.4%.
  • In August, consumer prices climbed 0.1% and wholesale prices rose 0.3% on higher automobile prices.
  • In August, U.S. industrial output rebounded 0.4% thanks to a bounce back in motor vehicle assembly.

What we’re seeing is that more Americans are buying new cars, plain and simply. Breaking it down, last month, Chrysler, Ford and GM sales grew at an annual pace of 11%, 12% and 15%, respectively. The average vehicle on the road is now 11 years old, so the auto industry is benefitting from a natural replacement rate, as well as low financing rates and a steady job market.

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 most car stocks? Let’s see how these companies are doing in terms of fundamentals and buying pressure:

As you can see, most of the big car makers have now been given the green light. In fact, of the four main automakers, only Honda Motor Co. (HMC) doesn’t make the cut to be a buy in this market. Why is that? Well, when it comes to fundamentals, Honda falls behind Ford, General Motors and Toyota on several fronts, including sales growth, earnings growth, earnings surprises and cash flow—which all receive failing marks. Overall, HMC fails for its Fundamental Grade, receiving a D-rating. And ever since the company released lukewarm operating results for the first quarter, institutional buying pressure has been wavering for this stock—as shown by its C-rated Quantitative Grade. And it certainly did’t help that last April Honda had to recall tens of thousands of cars due to airbag defects.

Meanwhile, the two publicly-traded big automakers—Ford Motor Co. (F) and General Motors Co. (GM)—have made quite the comeback in the past year. Both companies have trounced analyst estimates for the past several quarters and are headed towards robust sales and earnings growth this year and next. That’s because these companies have been going full steam to leave their troubled pasts behind them: GM has been hard at work on next generation fuel cell technology while Ford has worked to increase fuel efficiency while remaining the first choice for consumers that want an “All-American” car or truck.

As we approach third-quarter earnings season and all of the changes the next few weeks will bring, I’ll keep my eye out for new profit opportunities and red flags. In the meantime, we have the latest FOMC minutes coming out on Wednesday, so you can expect an update on the U.S. economy later this week.


Louis Navellier

Louis Navellier

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