The auto industry might seem somewhat stable – people are always buying cars, right? – but it can actually be quite volatile. Sometimes this works to your favor, sometimes it doesn’t. Make sure that you are aware of the factors that can impact auto stocks before you add them to your investment portfolio.
The Pros and Cons of Investing In Auto Manufacturers
When it comes to this industry, macroeconomics can be a major driver. For instance, if unemployment goes up or the jobs rate goes down, auto sales generally go down too, because most people finance their car purchases (you need a job to get a loan) and they rarely buy new cars while unemployed.
Likewise, you have to look at borrowing rates. When interest rates are low, people are more compelled to buy, even in a recession, but when interest rates are up, they often postpone new car purchases.
Labor relations (e.g. unions and strikes) also matter, as do tax breaks (e.g. buyers can use the money saved for a down payment on a new car) and tariffs (i.e. they can increase the cost of the vehicle, either eroding profit margins or forcing customers to pay a higher cost).
There is also the nature of the car business to consider – it is capital-intensive. Auto makers have lots of fixed costs, from factories to warehouses, equipment to (an extent) staff. If sales are slow, they can reduce production, but they still may not cover their operating costs and there is a good chance that they will generate bad press, which could impact stock prices.
Technology comes into play as well. Hybrid cars and alternatives fuels are wonderful concepts, but they also take tons of money to develop into commercially viable products. While many auto makers will be able to recoup those investments, it is unclear exactly when they can start and how quickly they can amortize those investments.
On top of all that, aesthetics can be unpredictable – the designs that a particular auto maker produces has to align with current tastes and trends or sales will be poor regardless of the macroeconomic situation.
Aside from color choices and vehicle shape, consider type. LMC Automotive, a forecasting firm, is predicting that 73% of vehicles sold in the US will be utility vehicles, like SUVs or trucks, only 27% will be car sedans or coupes. Before you buy stock in an auto maker, make sure that their production strategy matches demand.
Is Ford Stock Worth Investing In?
The Ford Motor Company (NYSE: F) has been reducing the number of vehicles in its product catalog.
Both brands and models have gone under the axe under the company’s One Ford program.
As recently as 2007, Ford boasted 27 vehicles in its model line-up. In 2015, the company released just 12 models. By 2019, there will only be 8.
It is a bold strategy and one that paid off initially. From 2007 to 2015, Ford grew its new profit margin to 3.8% from 2.3% – but it is a temporary move.
Instead of focusing on developing its current roster, Ford is looking ahead. By 2022, the auto maker is planning to have 40 eco-friendly vehicles on offer – 16 electric cars and 24 plug-in hybrids.
Some of the models might look familiar.
Ford is trying to electrify some of its most popular models. “If we want to be successful with electrification, we have to do it with vehicles that are already popular,” says Ford Chairman Bill Ford.
Ford is also moving away from cars, looking instead to crossovers, trucks, and SUVs.
According to CNBC, “ it will only offer two new cars in North America over the coming years — its iconic Mustang and the Focus Active, a rugged-looking hatchback that has already debuted in Europe, and somewhat resembles the Subaru Crosstrek or the Buick Regal TourX.” Ford is also focusing on off-roading vehicles, like the reintroduced Bronco and the Raptor.
Ford offers a generous 6.39% dividend yield.
Is General Motors Stock Worth Buying?
General Motors (NYSE: GM) is also reducing the number of cars it sells in favor of trucks and other utility vehicles, but don’t expect GM to cut production altogether. GM is home to dozens of different vehicle makes and many more models. Some of them serve customers in the US, some do not.
The breadth of its portfolio is a good hedge against changing consumer preferences and for appealing to niche markets. For instance, some of GM’s lineup is geared towards the growing Chinese market specifically and that has translated into major sales gains.
“Although passenger car segments have declined over the last number of years, they are still very important,” says Chuck Stevens, CFO of GM. “Small cars are important internationally, and they still make up a chunk of sales in the United States.” By maintaining some level of car production, GM is staying more diversified than Ford.
The two companies are fairly tied when it comes to “green” vehicles.
GM is just as excited about eco-friendly vehicles as Ford – the company is forecasted to add some 20 electric cars and those powered with fuel cells to its offering.
Plus, there is the possibility of driverless technology. US News and World Report says, “GM is also the only company that has officially filed paperwork for a fully autonomous vehicle, a fleet of driverless Cruise cars it intends to deploy in 2019.”
GM pays a 4.46% dividend yield and counts Warren Buffett among its shareholder base. Its dividend is lower than the Ford dividend but still higher than most of the market.
The company has also been generous with stock buybacks, which reduces the pool of shares and generally boosts share price over the long term all else being equal.
Before you decide which automobile manufacturer is right for your investment portfolio, you should know that there are some big considerations. Make sure to do your research on the individual auto maker as well as the market at-large and the economy.
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