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Growth Stocks

Adding Value: Automakers Revving Up for Growth

By Elliott H. Gue, on Sep. 3, 2013

After suffering through one of the most trying periods in its history, US automakers have emerged financially stronger and stands to benefit from a number of tailwinds in the domestic market.

At the end of 2012, the median age of passenger vehicles still on the road in the US touched a record high of 11.4 years, compared to about 9 years a decade earlier. This trend stems from the 2007-09 financial crisis and Great Recession, when sales of new cars and trucks collapsed from a pre-crisis range of between 15 and 18 million vehicles to less than 10 million at the height of the downturn.

Source: Bloomberg

Faced with the worst economic downturn since the 1930s, Americans put off purchasing new cars for a few extra years. Although total miles driven by passenger vehicles has declined by about 15 percent from pre-crisis levels, the average US driver still puts between 12,000 and 14,000 miles on his or her car each year. Most vehicles have a useful life of 150,000 miles to 200,000 miles; the rising age of the US automobile fleet implies that many of these cars will need to be replaced in coming years.

Not only should a strengthening US economy and declining unemployment rate support the ongoing recovery in sales of new cars and trucks, but the rising price of used cars–up more than 20 percent since their 2008 low–should also encourage this trend.

Source: Bloomberg

The uptick in the price of used cars makes new vehicles more attractive to prospective buyers and limits the extent to which automakers need to discount the latest models to drive sales.

At the same time, a secular shift is under way in the types of vehicles that consumers prefer. Concerns about rising gasoline prices have boosted demand for fuel-efficient compact and midsized cars such as the Ford Fusion, the Nissan Altima and the Honda Accord. All three models have sold well this year.

Source: Bloomberg

And although US automobile inventories have ticked up from their 2008-09 low, the supply of new cars on dealers’ lots is modest relative to pre-crisis norms. A glut of new cars usually forces dealers to discount aggressively, a trend that crimps automakers’ profit margins. This headwind has yet to emerge in the current cycle.

Source: Bloomberg

Credit availability and affordability have also improved dramatically, which should continue to fuel sales of new cars. Although interest rates have ticked up slightly this year, the cost of financing the purchase of a new vehicle remains near a record low. Favorable lease terms have also attracted buyers; leasing agreements now account for more than one-quarter of all new-automobile sales.

Source: Bloomberg

Whereas the US media tends to focus exclusively on the domestic automobile market, growing demand for new passenger vehicles in China and other emerging markets represent an important upside driver for carmakers. Despite slowing economic growth in China, sales of new cars and trucks have remained robust in the world’s largest automobile market, growing about 12 percent from a year ago through the first seven months of 2013.

This powerful, secular growth trend appears to have legs. China, for example, averaged 58 passenger vehicles per 1,000 people at the end of 2010, compared to almost 800 cars per 1,000 people in the US.

Source: Bloomberg

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