The worldwide economic slowdown is affecting the number of cars and trucks being purchased, and the prices at which the manufacturers are able to sell the cars. Sales are projected to be down in Europe and Brazil, and up in the U.S. and China in 2012.
OEMs are expected to lose money in Europe for several years to come, primarily because Europe is in an inevitable socialist financial crisis, and banks don't have money to lend to car buyers. "The problem with socialism is that eventually you run out of other people's money." -- Margaret Thatcher
Brazil is at the end of its profitable heyday in car sales. Demand is slowing due to tighter credit and an extreme increase in manufacturing capacity which is dwarfing the consumers' ability to absorb the excess production.
Sales are expected to be up in China, but the growth will not necessarily be profitable for imports due to higher taxes on some engines, and tariffs on U.S. imports. Significant deflationary pressures are also affecting the prices at which retailers can successfully sell cars.
In the U.S., cars on the road are old, with plenty of mileage, out of warranty, lacking fuel efficiency, and generally obsolete. New model launches are significantly higher in 2012 and 2013 than in recent years, which should add excitement to new car sales, expected to be up 9% this year.
Ford's (F) earnings are expected to drop 17% in 2012, Toyota's (TM) should be down 20%, and General Motors (GM) down 5%. So then who is making money in the auto industry? The companies that provide batteries, systems engineering, driveline products, power technologies, and various parts and services are the companies which will lead the 2012 auto industry in profitability. We'll take a look at some of these companies below:
Johnson Controls (JCI, $31.67) is my top pick today because it holds diverse appeal for four types of investors: growth & income, growth, aggressive growth, and traders. Johnson Controls is not a pure automotive play. The company provides batteries for autos and hybrid vehicles, plus systems engineering, marketing and service. But they also offer products and services to residential and commercial buildings along the lines of energy efficiency, air conditioning, heating, and industrial refrigeration products.
Johnson is rated Strong Buy by Standard & Poor's Research. 2011 revenues were $40 billion. They are expected to produce record earnings per share (EPS) each year, 2011 through 2014, with 15% 2012 EPS growth, 22% in 2013 and 22% in 2014. The company took a small net loss in 2009, and has otherwise been on track for sound fiscal performance. The long-term debt to capitalization ratio stands at 27%.
JCI has a price earnings ratio (PE) of 11.4, and a ten-year PE range of 8 - 22. The current dividend yield is 2.27%.
JCI is a volatile stock, and only appropriate for experienced stock investors. That being said, the stock is recovering from its fall with the market in Aug./Sept. 2011. If it retraces its high of $42, where it traded repeatedly in the first half of 2011, buyers at $32 could keep it long-term or trade out with 30% profit. Growth & income investors can lock in a yield of about 2.27%.
Barring stock market corrections or unexpected corporate news, JCI could easily re-establish a trading range of $36 - $42 in the near future. There is price resistance at $42 from trading patterns in 2011 and 2007, thus additional opportunities for traders to jump in and out of the stock going forward, if they so desire. For buy-and-hold investors, the above-average EPS growth should fuel attactive stock market performance in the years to come.
Dana Holding Corp. (DAN, $14.79) supplies driveline products, power technologies and genuine service parts for light and heavy vehicle manufacturers.
Dana Holding Corp. came out of bankruptcy protection five years ago. Margins are improving, leading to strong 2011 consensus earnings projections of $1.65 per share. Earnings per share (EPS) are projected to grow another 15% in 2012 and 21% in 2013. The price earnings ratio (PE) is 7.8.
Dana "reported a price-to-equity ratio of 23x versus the industry average of 8.6x. Also, it reported a quarterly revenue growth of around 29%, which was substantially higher than the industry average at 8%." -- 6 Stocks That Will Benefit The Most From Increased Auto Sales, SeekingAlpha.com, January 19, 2012
Morgan Stanley has an Overweight rating on the stock with a price target of $20 per share.
DAN began 2011 trading around $16 - $19, then fell with the late summer stock market correction to a range of $10 - $15. The stock looks like it's immediately ready to return to the early 2011 trading range in the high teens.
DAN is a good stock for long-term growth and aggressive growth investors. Traders could make about 25% by buying at the current price and selling when the stock hits resistance at $19.00.
Group 1 Automotive (GPI, $54.37) markets and sells vehicles and financing; maintenance & repair services; parts; and warranty, insurance and service contracts.
The company took a net loss in 2008, but has otherwise been profitable. Wall Street projects consensus earnings (EPS) to rise 13% in 2012 to $4.09 per share, and another 10% increase in 2013. The current yield is 0.96% and the price earnings ratio is 13.3. The company has a long-term debt to capitalization ratio of 31% and Standard & Poor's Research givees it a 4-Star Buy rating.
Auto industry stocks can be incredibly volatile. GPI fell from a high just over $60 in early 2006 to a low under $10 with the 2008 Financial Meltdown. The stock began its recovery about six months later, and has been rising & resting, rising & resting ever since. It's currently climbing, will probably reach its former highs around $60, then bounce around for quite a while in the $45 - $60 range. A growth stock investor would do well to watch the price this year and buy on dips around $50. Traders can take advantage of stock market corrections by purchasing around $45 and selling around $60 for a 33% gain.
For Townhall readers we’ve published our 2012 model portfolio for Trading and Aggressive Growth. For our subscribers, we’ve created model portfolios for Growth and for Growth and Income.
As of today - January 22nd, 2012, the growth and aggressive growth portfolios are beating the market as measured by the S&P 500 since we first published them in late December.
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