04 September, 2007

GM Posts Surprise Sales Increase but the Better Auto Investment is in the Far East

Worries over consumer spending due to the shake up in the credit markets spilled over into the automotive segment as analyst estimates called for lower sales virtually across the board. The big US Automakers: Ford (F), DiamlerChrysler (DAI) and General Motors (GM) have been pressured by International producers Toyota (TM) and Honda (HMC) among others.

August numbers proved to be lower for most of the Automakers with only GM posting an increase that was seen higher due to rental car sales deals. GM posted a 6% sales increase but that included an unsustainable 24% increase in sales to rental companies. Ford posted a 14% decline while Toyota declined 3%. Chrysler, now separate from Daimler-Benz also suffered decreases. Can the auto industry provide decent returns in the long term? It's an industry that is now seen almost in the same light as the airlines and that's not a good look for the stocks of these companies. GM had its share of problems but recovered and Ford has its own share or problems and seen continued pressure as a lack of innovative vehicles are crossing the Detroit assembly lines.

Buyers are looking toward smaller, more fuel efficient vehicles due to the continued high price of gasoline and its Toyota, Honda and Nissan (NSANY) that benefit the most. In fact Honda and Nissan posted sales gains in the month. That's a promising sign as the overseas markers are capitalizing on not only American consumer trends but worldwide trends as well. The US automakers are struggling to find areas of growth and have shown that the innovative nature of American Car Design is all but dead. I personally can not remember the last American made vehicle that brought upon any kind of positive response except for the retro-styled Ford Mustang.

That's not to say that Toyota or Honda or Nissan make the prettiest cars either. The difference is though, that the luxury lines of these automakers are renowned for innovative breakthroughs and design promise. Honda's Acura line and Toyota's Lexus line are terrific positives for brand and design image and are one of the reasons that these auto makers deserve a slight market premium, in terms of a higher P/E ratio. Honda stands at 11, Toyota at 12 while GM sits at around 10 and Ford is trying to get back in the black after being plagued by losses.

To really turn the US automakers around a grass roots design reinvention has to take place and this is no easy task. The overseas players have the brand power (luxury lines), the incentives (cheaper more fuel economic cars), and the worldwide manufacturing to compete with and overtake their American counterparts. Toyota has some work to regain its highs close to $140/share but with its strategy well in place the sales growth should continue and barring an American miracle should emerge as the Car Maker of the world. Honda is a third the size of TM in terms of market cap and has room to grow its plant and model base.

The era of the great old American car maker is over for the time being as Japanese manufacturing strategy becomes more entrenched and the vehicles become more affordable and practical for the average consumer.

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