Industry in Faster Lane Than Wall St.
The leading industry of the 20th century is selling at a discount going into the 21st.
Stocks of the world’s leading automobile companies are all selling at low prices compared with shares of firms in other industries. Indeed, Microsoft’s total stock market value is greater than that of all the leading auto companies combined.
Yet the low prices of General Motors, Ford, DaimlerChrysler--and of Toyota, Honda, Volkswagen, Nissan and others--are a mystery.
The U.S. economy remains strong, employment and personal incomes are up, and so are sales of new cars and light trucks--which are heading toward a record this year of more than 16 million. Europe’s economies have come out of a slumber this year, and new vehicles are selling briskly.
Auto maker profits are high, and most of the companies have strong balance sheets and sizable cash reserves.
But investors worldwide find fault. The industry is too subject to swings in the economy, some analysts say. Or, they say, U.S. auto makers are too dependent on profits from sport-utility vehicles, minivans and pickups--products that are unappealing to overseas buyers and impractical on the rest of the world’s narrower roads.
Many investment analysts see auto making as a heavy industry that makes huge capital investments for less-than-attractive returns.
That’s why “car makers have a Rodney Dangerfield problem--they get no respect,” says one motor industry executive.
But those investment community judgments are short-term at best and in many ways simply wrong.
A contrasting view is that the leading automobile companies--those named above plus Renault of France and BMW of Germany--constitute a phalanx of industrial might that for the next 20 years at least will deliver a car for every age, fashion and pocketbook in developed and developing countries throughout the world.
These companies supplied roughly 38 million of the 47 million vehicles sold in the world last year. They are the surviving and powerful leaders of a global industry.
Their current stock prices emphasize problems and don’t give enough credit, as analyst Nicholas Lobaccaro of Lehman Bros. puts it, “to their abilities to offset and correct those problems.”
A brief look at dynamic auto markets and companies offers a different perspective.
For example, the stock market’s view that the SUVs and minivans that conquered the U.S. market in the last decade won’t sell overseas is off the mark. SUVs and minivans now make up 50% of Japan’s automotive market, says Honda President and Chief Executive Hiroyuki Yoshino.
That spells change in the U.S. market too. Where GM, Ford and Chrysler had the profitable light-truck field largely to themselves for many years, Honda, with its Odyssey minivan, and Toyota, with Tundra full-size pickups made in Princeton, Ind., are making impressive inroads.
World auto markets are increasingly fluid. GM reportedly is thinking of using its Isuzu affiliate in Japan to make light trucks and perhaps to introduce Japanese models in Eastern Europe. Volkswagen makes Skoda cars in the Czech Republic and sells them in Britain and other markets.
Latin America’s markets remain tiny--somewhat more than 1 million vehicle sales a year. But sales will grow in the next 10 years, especially in Mexico, which will emerge as a major manufacturer of automobiles and parts for North and South America. GM, Ford, DaimlerChrysler and Volkswagen will be the initial beneficiaries, but all the world’s leading companies will pile in.
The hotly competitive environment puts a premium on control of costs and efficient manufacturing. Toyota raised the bar on that score by announcing last week that it can now make a car in four days in response to an Internet order.
The claim is significant for what it says about Toyota’s manufacturing abilities. The giant company, with roughly $90 billion in annual sales, achieves many economies by working through networks of parts suppliers. It employs fewer workers directly than its U.S. and European competitors and thus has lower costs.
GM, in particular, is now trying to reduce costs and streamline manufacturing by relying on supplier companies to deliver modular subassemblies to replace scores of individual parts. It faces stiff opposition from the United Auto Workers union, but some compromise will be necessary because nonunion Toyota achieves the same competitive efficiency in Indiana and Kentucky as it does in Japan.
Then again, both Daimler-Benz and Chrysler, which merged last year, are known for excellent manufacturing, as is Ford. GM indeed faces a challenge.
The Toyota claim is also significant for its reference to the Internet as a part of car distribution. There are now more than two dozen Internet sites offering buyers information on prices and referrals to dealers, according to J.D. Power & Associates, the research firm.
Priceline.com, the Stamford, Conn.-based Web site, began a year ago in the New York market to act as an agent for car buyers, taking customer bids to dealers.
“More than 57% of my customers have consulted an Internet site before coming to my showrooms,” says Fritz Hitchcock, who has dealerships for Ford, Toyota, BMW and other nameplates spread around the Los Angeles area.
Buyers with information and dealers on the Internet will make prices more competitive than ever in an industry in which the best companies make less than a nickel net profit on each dollar of sales.
But return on sales is only one measure of profitability. Most of the leading companies, led by GM and Ford, make 20% and more on shareholders’ investment. That compares favorably with the returns of information companies such as Hewlett-Packard and Cisco Systems.
The auto makers are not only big companies but also rich ones, with ample cash reserves. Ford has $25 billion in ready cash; GM, $20 billion; Toyota, $16 billion. That’s important because it gives the companies flexibility to make operational moves--or financial ones.
With stock prices low at the moment, analysts are urging GM and Ford to buy back shares. It’s a way to lift the stock price and also a recognition that their own shares are a good investment, says analyst Saul Rubin of S.G. Warburg Dillon Read, the investment banking firm.
What it all adds up to is that the automotive industry, which remade the world in the last 100 years, has a lot to look forward to in the next 20--even if the stock market doesn’t see that today.
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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.
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Taking the Back Seat
Auto stocks are selling at such low prices on markets worldwide that the market capitalization of software company Microsoft is greater than that of all leading car makers combined.
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Friday Total value of Company close shares, in billions Ford $48.13 $58.2 General Motors 60.25 39.0 Toyota* 66.13 124.3 Renault** 52.97 10.8 Nissan* 10.94 13.7 Volkswagen** 56.97 21.3 DaimlerChrysler 75.00 76.0 Honda* 43.39 42.3
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Combined value of above auto makers: $385.6
Microsoft: $434.5
*Based on prices of American depositary receipts
**Priced in euros, translated to U.S. dollars
Sources: Bloomberg News, company reports
