Auto stocks face an uncertain road
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Is it safe to drive off in an auto stock?
The automobile sector has endured a rough ride in the last two years.
First, sales fell off a cliff during the recession.
Then, as the car business appeared on track to a recovery, Toyota Motor Corp. -- perhaps the industry’s strongest player -- was hit by a barrage of trouble over complaints of unintended acceleration.
The sector’s emerging rebound spells potential opportunity for investors, but stock analysts advise them to navigate carefully.
“We’re enthusiastic” about the prospects for an industry recovery, said Steven Dyer, an analyst at Craig-Hallum Capital Group in Minneapolis. “With that said, we think it’s going to be uneven.”
Car sales in this country are projected to rise this year for the first time since 2005.
But U.S. sales are unlikely to come anywhere near their 2005 peak, and the fortunes of some companies appear much brighter than others.
And even the strongest carmakers face intense competition, consumer spending that is still restrained, and the challenge of profitably churning out fuel-efficient vehicles.
Shares of Toyota and Ford Motor Co. are trading around their levels of five years ago -- for different reasons.
Toyota’s image has been dented by the sudden-acceleration issues as well as brake-related problems with its Prius hybrid -- troubles that have led the company to recall millions of vehicles.
The firm’s woes were cast in sharp relief last week when it reported an 8.7% drop in February U.S. sales from a year earlier as rivals notched big gains.
The Japanese giant’s 12.8% market share last month was its lowest in almost five years, according to automotive research firm Edmunds.com.
Many analysts, contending that consumers’ memories are short, don’t expect Toyota to suffer lasting damage. But its stock, which is listed in Japan and trades as so-called American depositary shares on the New York Stock Exchange, has skidded 16% in less than two months.
The U.S.-traded shares dropped $1.27, or 1.6%, on Tuesday to $76.67 following accounts of a runaway Prius in San Diego County. The stock had peaked at a 17-month high of $91.78 on Jan. 19. A year ago, with the recession still raging, the shares bottomed out at $57.68.
A definitive resolution of Toyota’s safety woes would help the stock rebound.
“We think there’s upside potential to the share price . . . but not enough that it warrants a ‘buy,’ ” said Efraim Levy, an analyst at Standard & Poor’s.
The risk to investors is that Toyota hasn’t properly diagnosed the cause of the sudden acceleration. The automaker has blamed the problem on faulty gas pedals and floor mats and rushed replacements to dealers.
But skeptics suspect the root cause is an electronic malfunction. If so, that could prolong Toyota’s public-relations nightmare and further depress sales -- a prospect that concerns many market watchers.
“There are other places for one to put their ball on black or red than on Toyota at the moment,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.
At the other end of the spectrum, Ford is on a roll. Its unit sales soared 43% in February from a year earlier, giving it 18.2% of the U.S. market, up from 14.2% in February 2009, according to Edmunds.com.
Mired in severe financial difficulties three years ago, the company has slashed costs, cut back on underperforming brands and worked to standardize parts development across models.
Thanks to borrowing it did before the 2008 credit crunch, Ford avoided the need for a big government bailout, like those used to rescue General Motors Co. and Chrysler Group. (Although GM and Chrysler have emerged from Chapter 11, their shares don’t trade.)
Ford also has made strides in customer satisfaction and quality ratings, and its current lineup has received generally good marks from critics, said Ivan Drury, an analyst at Edmunds.
The company notched its first annual profit last year since 2005. Its share price reflects its resurgence, closing at $12.80 on Tuesday, up from $1.26 in November 2008.
Some analysts say Ford shares will cool off, but many are bullish long-term.
“We think they’re clearly the class of the automakers right now,” Dyer said. “They have a fantastic lineup. They have whittled down their cost structure, they didn’t take bailout money and they’re taking [market] share.”
The woes of GM, Chrysler and particularly Toyota present a big opportunity for Ford, said Bill Selesky, an analyst at Argus Research.
“It puts them on the map where people will actually look at them as an alternative, whereas three or four years ago people wouldn’t even think of that,” he said.
Another company poised to exploit Toyota’s troubles is Japanese rival Honda Motor Co., which has benefited from its lineup of generally fuel-efficient vehicles -- and from a decision several years ago not to develop a large sport-utility vehicle.
Japan’s second-largest automaker, Honda also is being helped by strength in its motorcycle division and by rising auto demand in emerging markets such as China and India.
The company reported better-than-expected third-quarter earnings last month and boosted its fiscal-year profit estimate.
Its U.S.-traded shares have been climbing for much of the last year, closing Tuesday at $36.01, up from a low of $18.19 in December 2008. Its all-time peak was $40.78 in February 2007.
Shares of German rival Daimler have sputtered amid the downturn in luxury-car sales and a poor performance by its truck division.
The stock, which trades on the Big Board, is down 16% this year and off 60% from its 2007 peak.
Daimler, which ended its disastrous U.S. venture by disposing of its remaining stake in Chrysler a year ago, is overhauling itself to shore up its position in the luxury market, appeal to younger buyers and establish a foothold in the market for environmentally friendly cars.
But the maker of Mercedes-Benz automobiles suffered an unexpected fourth-quarter loss last month, decided not to pay a 2009 dividend and issued a downbeat assessment of its prospects.
“Although there are some signs of global economic recovery, there is no reason to assume that the crisis is over,” the company said.
