Big 3 Auto Stocks Driving Investors Into a Frenzy


Wall Street knows the importance of momentum, and that’s what it sees in car and truck sales this year. Auto-related stocks, therefore, remain a favorite way to bet on a stronger than expected economy in ‘94--even though most of the stocks have already zoomed.

On Thursday, the Big Three auto makers provided more inspiration for the bulls: Despite relentless cold in the eastern part of the country, and the earthquake in the Southland, January car and truck sales by General Motors, Ford and Chrysler were up nearly 15% versus a year earlier.

Investors, who were stunned by Chrysler’s robust fourth-quarter earnings report two weeks ago, responded to the latest good news by pushing shares of the Big Three up sharply again Thursday. GM rose $1.50 to a record $63, while Ford jumped $1.625 to $69.375 and Chrysler added $1.25 to $62.50. Both Ford and Chrysler are trading just under their all-time highs.


Many Wall Streeters now are stirring the frenzy for the auto shares by touting price targets in the $80s or $90s for the stocks a year or so down the road. The optimists’ scenario: Car and truck sales continue to boom, earnings keep topping estimates, and waffling investors finally capitulate and jump in, lured in large part by the stocks’ comparatively low prices relative to earnings per share.


A key assumption of the bulls, however, is that investors will believe that car and truck sales can continue to rise well into 1995 and 1996, if not beyond. In the auto industry and others that ride long cycles of boom and then bust, you don’t buy the stocks if you can see the bust on the horizon. By that point, smart investors are already bailing out, anticipating the next downturn in earnings.

So far, almost nobody’s talking bust. Among other things, experts point to the advanced age of cars and trucks on the road as a sure sign of sales yet to come. Ron Glantz, analyst at Dean Witter Reynolds, says at least one-quarter of the U.S. car and truck population is 12 or more years old.

More important, rising consumer confidence and faster job growth as the economy expands should put more Americans in the mental and financial states necessary to buy big-ticket items such as cars. “We’re now getting employment growth, and generally you need a car to get to a job,” notes David Hale, economist at Kemper Corp.

Finally, the once-feared Japanese continue to lose market share to the Big Three, and nothing suggests a significant reversal of that trend soon. Chrysler’s share of the car and truck market rose to 14.8% last year from 13.3% in 1992, while Toyota’s dropped to 7.4% from 8.0%.

All of this feeds Wall Street’s glowing earnings outlook for the Big Three. Ford, for example, is expected to report that it earned $4.12 a share in ‘93; it should double that figure between 1996 and 1998, according to Value Line Investment Survey.


Not everybody buys the unending-growth story, however. Many money managers remain skittish about GM in particular because of its huge pension liabilities, which could severely hamper its finances. And some big investors simply worry that all the good news is already built into the Big Three stocks, with no room for trouble--such as a rise in interest rates or an international incident that causes consumer confidence to plummet.

Wall Street is “striving to make this a secular (story), but I just can’t convince myself that these stocks are anything more than the cyclical issues they’ve always been,” says John Schaffner, manager of the $450-million Nationwide Growth stock mutual fund in Columbus, Ohio.

The bulls argue that skeptics just need time to catch Big Three fever. And the favorite of many analysts remains Chrysler, with its promising new-car lineup for ‘94, starting with the already- launched Neon in the small-car, low-priced arena.

“Chrysler has today’s cars,” gushes New York money manager Seth Glickenhaus, a major Chrysler shareholder. “They’re on a roll.”

But let’s say you don’t want to own the Big Three, yet you would like to play the auto boom. Is there a better way--via auto parts suppliers, for example? Most analysts say no. Look at the price-to-earnings ratios on the parts suppliers’ shares versus the Big Three’s P-Es. The Big Three are still the better value, most auto bulls say.

A few possible exceptions: Federal-Mogul, a major parts maker and distributor seen in strong shape to benefit from future parts demand in the aftermarket (i.e., repairs) here and, importantly, abroad; parts retailer Genuine Parts, considered overlooked by some despite its powerful franchise in the United States, and Reynolds & Reynolds, a developer of data-processing systems for car dealers, many of whom need to modernize.


Ready for Overdrive?

Here are analysts’ consensus earnings-per-share estimates for major auto-related stocks (or actual numbers, if reported) and the stocks’ price-to-earnings ratios based on 1994 earnings estimates.

Thurs. Est. EPS: P-E on Stock close ’93 ’94 ’94 EPS Chrysler $62 1/2 $6.77* $7.71 8 Ford 69 3/8 4.12 6.19 11 GM 63 2.15 4.92 13 Goodyear Tire 47 5/8 3.24 3.77 13 Std. Motor Products 25 1.48 1.65 15 Genuine Parts 38 1/4 2.09 2.33 16 Reynolds/Reynlds 45 5/8 2.40* 2.80 16 Automotive Indus. 32 1.41* 1.73 18 Cooper Tire 25 3/8 1.24 1.43 18 Federal Mogul 36 1.13* 1.68 21 Superior Industries 43 3/8 1.45 1.76 25

* Actual 1993 operating earnings

All trade on NYSE except Automotive Indus. (Nasdaq)

Source: Zacks Investment Research