Toyota's Attractive Prospects and Global Positioning

The car maker from Japan, the country's largest, suffered a drop in August output, but the pride of Toyota City remains primed to continue its automotive leadership worldwide. Global output from Toyota (TM) fell around 9% year over year, but conditions economically are more stable and the additions of government programs, such as the US Cash for Clunkers and Japan's subsidy program, are helping efficient automakers move more units.

In fact, Toyota has reaped the biggest benefit of the majors from such programs and has raised its 2009 calendar year production run. The rise of 8% means the manufacture of 6.45Million vehicles total for this year. It was widely reported that Toyota owned the largest percentage of new vehicle sales under the Cash for Clunkers program in the United States, with the brand owning 3 of the top 5 new car spots, a testament to the message of Toyota as a fuel-efficient, safe and reliable car maker. Moreover, in Japan, Toyota enjoyed a 9% sales rise in August due to the Japanese subsidy program, that similar to the US, offered nearly $3000 towards the purchase of a fuel-efficient vehicle.

Toyota has rallied from lows in the mid 50s with the market since March and had hit a new high in the mid-high 80s as recently as a month ago, however, with the stock sliding below the $80 mark, down 2% Tuesday, it's time to look at Toyota again as the stable play in the automotive sector and the one with the best chance for production growth in its near future as the global economy recovers in 2010.

Disclosure: Author does not own TM

Government owned General Motors bails out Dealers stalled by Government [Update]

This little gem of a news story is making the rounds recently as General Motors dealerships across America are on the verge of closing shop due to cash flow issues relating to the Cash For Clunkers program.

The program itself has been a huge success for the Automotive Industry, specifically the car makers, with not only General Motors, but American rival Ford (F) announcing increases in production to keep up with demand. So far reports indicate that about 450,000 vehicles have been sold in the US qualifying for the program, with recent statistics showing Toyota (TM) vehicles holding 3 of the top 5 spots. Nearly half a million vehicles is not an insignificant number in the fight to increase average American fuel economy but herein lies the rub. The wildly successful program has already run out of money once, gotten an infusion of cash to extend it, and still is so far behind the 8-ball on the administration side of things that dealers around the country may have to shut their doors. While this program is expected to bump vehicles sales past the 1 Million mark for the first time in longer than a year, the under-pinnings of and bureaucratic red-tape within this program still have a ways to go.

Cash For Clunkers, which gives up to $4500 in rebates to car purchasers, provided they buy fuel efficient vehicles and trade in gas guzzlers or old piles of road junk, is leaving dealers holding the bag when it comes to running operations. It is now reported just how far behind the Government is in issuing rebates to dealers, with 37% of rebates having been processed, but the percentage of payouts still unknown. The articles flying across the news wires lately have been full of quotable frustrations from dealers. One company is apparently looking out and stepping in to help.

General Motors is that company, 60% Government-owned General Motors following the structured bankruptcy that is. The company, err Government, is lending money to dealerships in an attempt to keep them operating until the Government can process their sales and send the appropriate rebate dollars. GM will take the money back from dealers within a month's time if the Department Of Transportation has issued funds to that specific dealer, so this plan is wildly considered an operational stop-gap measure. General Motors is on the right track here as in the market share game, it can't afford to have its dealership network crippled during the busiest car buying spree in over a year. The irony of it all, especially for Uncle Sam is something else entirely!

Update: Press updates regarding 37% of rebates process with unknown % having been paid out.

Disclosure: Author owns TM, holds no position in any other companies mentioned

GM is finished as Bankruptcy nears, shares slide below $1

Shares of General Motors (GM) are off about 20% today as all signs are pointing to the inevitable bankruptcy filing on Monday June 1st. The struggles in Detroit continue to drag down domestic Automakers but GM's well-publicized cash flow problems and stand-offs with the Federal Government have led to its demise.

Unlike Motor City brethren Ford (F), GM was unable to reign in enough the costs that had been spiraling out of control as deals with the UAW and CAW only go so far. The cost-cutting pacts with the Canadian union and the ownership agreements with the US Union could not in the end support the business model without an infusion of outside help that wasn't in sight. Italian car maker Fiat is still interested in GM's European operations to the tune of a merger with the Opel brand, but without a leg to stand on, General Motors as this generation has come to know it, no longer exists.

The electric Volt will not save the company now, far too little and far too late, all that will happen now is a sell-off of assets to anyone willing to buy. Perhaps GM can pick up the pieces and re-emerge as a brand in-tune with a new generation of motorist, but as a company and especially as a stock in today's market it is.

Turmoil at GM can only mean good things for competitors, with the company distracted by the slashing of assets, the brokerage of deals & spin-offs and the necessity of brazen survival for workers up and down the corporate chain, the only winners will be other car-makers.

Names like Ford, Toyota (TM) and Honda (HMC) should emerge with a stronger competitive advantage while luxury European brands continue to fight for the affluent customer throughout North America. Auto Stocks are all marginally higher today signaling that although one of the Titans of the industry has fallen, the car business will not go away and the remaining horses in the race will not slow down to pick each other up. What sometimes seems like a 0-60 sprint in the car business actually is and I expect the other big automotive companies to not pull any punches when it comes to advertising their strengths, and as is always prudent advice when it comes to investments: Stick with the strong.

Disclosure: Author owns TM

Rally Continues past April Fools

The 2nd of April, typically a let down day for pranksters has markets rising like the Sun in the East. North American markets had spent March on an absolute tear, had the Madness from the NCAAs spread to the trading floors or was there finally something to be optimistic about?

Well, first and foremost the G20 summit has economists, investors and the media talking, which is always a good thing, especially if what's being talked about is recovery. Not only recovery, but how to get there. The month of April has opened with positive market gains despite a jobs situation in America that if taken by the numbers seems as dire as ever. Jobless claims rose to about 670,000 in America at the end of March, as high a figure as has been seen since 1982, but the G20 leadership, and that leadership's commitment to economic strength going forward has investors optimistic.

The latest reports out of the G20 summit have leaders close to agreements on stricter financial rules, including the use of tax havens, and a planned influx of money to the International Monetary Fund in order to help fight the global recession. This total could reach upwards of $1Trillion based on the unveiling of the plan by Britain's Prime Minister Gordon Brown.

It isn't just the G20 that has been providing the spark of late. In the Auto Industry, one of the hardest hit by the curbing of consumer spending, Toyota (TM) showed a sales increase of 18% in March, compared to February of this year, which led of a Vice President at the company predicting that Toyota has seen and moved past the bottom in slumping car sales. Toyota is up 14% in the last two sessions.

Piracy, a long and hotly debated issue came to the forefront of the press yesterday as a major 20th Century Fox motion picture was leaked online a month before its theatrical release. X-Men Origins: Wolverine, which is a follow-up to the hugely successful X-Men franchise for Fox and its parent News Corp (NWS) and based on the characters created by Marvel Entertainment (MVL), was set to be a summer blockbuster and tent-pole film for the studio. An unfinished, but DVD quality version of the movie somehow found its way around the Internet for fans and commentators alike to have a look. How this plays out in the month ahead is guess-work but bad word of mouth amongst the core fan-base could spell trouble for Fox, which is coming off of an abysmal 2008 movie year.

The first weekend box office for comic book movies depends heavily on the core fan-base and intelligent marketing, but if the movie doesn't live up to expectations and the core fans get to see it in nearly completed fashion a month prior to release, the effects of piracy will be felt harder here than ever before in Hollywood. News Corp, being the giant conglomerate that it is, is unharmed for now as the stock has risen 7% today along with the broader market.

Today's continued bullish sentiment was broad, with seemingly all sectors moving higher. The Dow, which has broken 8000 this morning is joined by its American benchmark brethren with gains of nearly 4% as of this writing. Question is, should investors be cautious for when the Sun sets in the West in the weeks ahead?

Disclosure: Author owns MVL

Friday Market Notes

With the majors hovering around the flat line for most of the morning trade, the one thing that's easy to determine is the market's general lack of direction. Stimulus news dissemination could be the main culprit, but more than likely its the sparse rash of headlines that paint a directionless picture.

Making waves this morning are further retail struggles at Abercrombie & Fitch (ANF) with a 4th quarter year over year drop of 68% in earnings. Despite the profit fall, the company did meet tempered expectations despite Chairman Mike Jeffries comments about the industry having an end of year that could only be described as "catastrophe". Not giving guidance due to the hazy economics of the day, ANF finds itself well in the green up 11% on the results.

While the talk has been of retail disaster, Microsoft (MSFT) is taking the other approach and jumping into the retail sector. Taking a page or two from Apple's book (AAPL), the company has hired a former Wal-Mart-er to head a retail store operation. No details have yet been given in terms of specifics, but judging from Apple's incredible success with its retail chain, driving customers to purchase an ever growing arsenal of products, Microsoft will undoubtedly try to replicate the experience. A task easier said than done, but one the world's largest software company has to endeavor if only to stem the tide of mind share defectors form its Windows brand.

Well the Car business is still terrible, according to Toyota (TM). Inventory levels continue to be high as sales drop month after month, forcing Toyota to shut production at many of its facilities around the world. This includes plants in America, Canada and Mexico. The cost cutting measures, which also stem some executive pay, are the latest of efforts by a car maker to incite some sustainable increases to profitability. Increases that hopefully result in a spark to lagging share prices as the industry sits in a holding pattern waiting for consumers to reacquire credit and the desire to purchase big ticket items.

Disclosure: Author owns AAPL

Bad News Bears economy continues to crush Automakers

Customer pessimism continues unabated in the United States leaving big ticket item sales near lows not seen in half a century.  For Automakers, this combined with the lack of credit for leases, means car sales are still plummeting. Detroit's problems have been well documented of late but even Japan's best saw US sales slump dramatically in December.

General Motors (GM) sales were down 31% in the last month of 2008, which pegged US sales over the year at a 49 year low. The American recession and consumer unsettling fears were the main culprits of blame, however with the company needed Federal bailout funds, it can't be stated that all is right with the biggest name in Michigan.

Ford (F) sales were almost a mirror image of its American brethren, down 32% in December, which netted total sales volume at a 47 year low.  Chrysler for all intensive purposes fared even worse according to analysts, who estimated 48% declines in December for the privately held American Automotive firm.

The United States car sales picture wasn't just bleak for domestic brands. Japan's best, Toyota (TM) and Honda (HMC) suffered sales drops 37% and 35% respectively in December.  At this point in the American economic cycle the consumer isn't discriminating, he's simply not setting foot into any dealership.  

This sales slump has taken a substantial bite out of the market capitalization of all automakers. 

GM, despite today's +4% day, sits down 58% over 3 months. Market Cap: $2.3Billion

F, up almost 5% today, down 36% over 3 months. Market Cap: $6.1Billion

TM, down 16% over 3 months. Market Cap: $103Billion

HMC, down 20% over 3 months. Market Cap: $38.7Billion

Despite the fact that the Japanese car companies have market caps that dwarf their American counterparts the sales slumps pose a potential opportunity. Amazingly, I think this bodes well for the American automakers, assuming of course all 3 get enough aid to keep afloat into any economic recovery.  The sentiment remains that Japan's best cars are still far more attractive to consumers on value for money and fuel economy but with car sales slumping across the board, it gives the struggling domestic makers more time to design, build and market attractive products in their local markets. Those consumers who today and tomorrow will not be buying the latest Honda Accord or Toyota Camry could potentially be swayed in 6 months time by a flashy, small, affordable and efficient Ford of Chevy vehicle.

All this still leaves one big if, can these companies build that attractive vehicle and turn around market sentiment? Recent history has shown the answer to be an emphatic no.  But, with recent government lifelines, the hope exists for a Detroit resurgence in 2009 and beyond.

Disclosure: Author holds no position in above mentioned companies

Is anything worth owning in the Auto Industry?

In short, with today's high Oil prices and report after report from the big automakers cutting production, the answer's a resounding No! There's simply nothing compelling out there valuation wise in the Automotive space.

Ford (F)? Virtually slashing it's popular Truck line in half with delays and production cuts, and the only car worth talking about, besides police departments contracts, is the Mustang which now has been stagnant for almost half a decade.

General Motors (GM)? $40Billion in the hole and counting... Not to mention probably the ugliest set of cars in America goes to Chevrolet. Truly incredibly uninspiring automotive design.

Toyota (TM)? Actually the only compelling value out there with a P/E of 9. However, whispers of US sales expectation management are seeping through the proverbial cracks, which will put some serious pressure on upcoming earnings reports. The company has the clout of being the "leader" in the Hybrid segment going for it but could the Prius possibly look any worse, and if the respectable Jeremy Clarkson of Top Gear is to be believed, in a race the Prius provided worse fuel economy than a BMW M3! (*Obviously the car was not run under normal conditions*)

Toyota at levels below $100 is one to put on the watch list, however times will continue to be rocky in the Automotive segment as a whole until Oil speculation subsides and consumers instill in themselves a renewed confidence to go driving again.

Of the companies traded in the US, the only one continuing to do reasonably well is Honda (HMC). Is it a big secret that it is up 4% Year to Date while others are off significantly? F (-20%) GM (-40%), DAI (-30%), TM (-10%).

Honda's secret sauce? Fuel efficient well engineered cars, that have very good engines, are impressively reliable and most importantly, don't make you loathe getting into them every single morning. It isn't hard to understand that successes like Accord and Civic, year after year show up on best lists and best seller lists. The Acura luxury line continues to produce winners as well, but a watchful eye on the headlines is a necessity in this sector.

With Toyota starting to whisper statements that US sales targets will be "tough to meet" it doesn't require multiple graduate degrees to surmise Honda may be in for some dry spells to come. While at this stage Honda is a Hold in this book, closer to $30/share is an attractive entry point for an innovative car company, that yet sees almost none of the corporate stumbling blocks faced by its US peers and has a big enough worldwide presence to funnel out good small cars all over Europe and Japan.

Disclosure: Author holds no position in the above mentioned companies.

Update: Thursday June 26, 2008. Statement to clarify Chevy as a division of GM

Markets continue Bearish Tone post Fed, Recession fears creep in again

The week of the last Federal Reserve decision of the calendar year ends on another bearish note. Markets continued to pile up losses after the Fed's 25 basis point rate cut. Major indices in the US fell about 1.3%.

For the week the Dow Jones is down 285 Points, or 2.1%, but from the pre-Fed peak the major average is down over 400 points ending the week at 13340. The catalyst today was the American Inflation Report. Consumer Inflation in November rose by its highest total in over 2 years, led of course by every ones favourite commodity: Energy! Gasoline Prices were the major source in the increase in inflation, which caused today's market sell-off.

The CPI (Consumer Price Index), which is the main measure of inflation rose 0.8%, and even the core inflation number, which does not include energy, rose 0.3%. Traders were spooked by this as the Fed is treading a fine line between doing what's right for the economy and the crumbling credit markets and balancing the inflationary effects of lower interest rates. The dreaded "Recession" word came up again as fear of higher inflation data will lead to a pause in Interest Rate Cuts by the Federal Reserve in the future. When Traders talk Recession, growth stocks are the hardest hit, as the logical thinking is, growth is driven by positive country-wide economics.

The hardest hit sector today was consumer based.
More Logical trader thinking;
Recession fear = Folks Spending less money!
Especially on big ticket items so the big Automakers saw selling. Toyota (TM), Daimler (DAI), Nissan (NSANY), Honda (HMC) all were off more than 2.5%.

Although, most of America is probable concerned with what's gonna happen to "The Rocket" Roger Clemens, after being named in detail in the substantial baseball steroid investigation.

Markets Stumble out of the gate in December, Automaker sales Struggle

The month of giving and receiving started on a bumpy note for North American Markets as major indices were all lower. Nasdaq was the biggest loser on the day with an almost 1% drop, compared with the Dow, S&P and Canadian TSX, all losing between 0.3 and 0.6%. Today's selling was in part due to lackluster Automotive sales numbers.

General Motors (GM) reported a decline of 11% in sales numbers, while its major competitors Ford (F) and Toyota (TM) reported flat month-over-month sales. The only increases were seen in Honda (HMC) and Nissan (NSANY). It is clear that high oil prices are skewing buying towards smaller and more fuel-economic vehicles and that's putting a hefty dent in truck sales for the American brands. Punctuated by GM's 15% drop in Truck Sales.

The big story that is oil keeps rumbling around in the head of the average consumer and it is most evident in consumer spending on cars. In fact demand for smaller cars, more efficient cars, and even hybrids is remaining strong, according to Toyota. Seemingly though, what hope do big time car makers have in the United States? Their consumer is witnessing a de-valuation in home equity, gas prices that make it more than $50 to fill a tank, and a currency that worldwide is eroding faster than the Dolphins chances of winning a game this NFL season.

Truth be told, its a tough time for the car makers, and the executives are well aware of the difficulty. The trick will be, which company can provide the most incentives and the most practical products going forward into next year. From my view owning the automakers is a tough call right now but I like the path of Toyota and Honda, as those companies seem to follow consumer trends better and more nimbly than their American counterparts.

Disclosure: Author does not own any of the companies mentioned above

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.