It’s no secret, if you follow my writing, that I really like Ford Motor Company (NYSE:F) as a great value play. I’ve covered many specific reasons why I think Ford has turned into an incredible company since Alan Mulally took over and waded through the recession without a bailout.
That said, Ford, like many of its peers, remains undervalued, because risk-averse investors cling to past perceptions of the automotive industry. I understand the reluctance to believe that Detroit has finally learned its lesson and is now producing vehicles that are in demand. However, the misperception offers savvy investors an opportunity to profit from others’ reluctance. Let’s take a macro look at some factors and see if future vehicle sales will continue to rise — increasing profits for automakers.
To put it simply, the better, faster, and stronger the U.S. economic recovery is, the happier automakers will be. Right now, Detroit gets the vast majority of its profits from North America. The more people feel secure about their jobs and their futures, in general, the more people will make that vehicle purchase that they’ve long put off.
While February’s unemployment report came with plenty of caveats, it was enough to make Wall Street happy. U.S. employers added 236,000 jobs in the month, making it the best jobs report since last November. It was enough to drop unemployment from 7.9% to 7.7%, the lowest since December 2008. Things are looking up, albeit slowly, and that’s good news for Ford, General Motors Company (NYSE:GM), and Japanese rivals Toyota Motor Corporation (ADR) (NYSE:TM) and Honda Motor Co Ltd (ADR) (NYSE:HMC).
Investors will, however, have to keep an eye open going forward, because the substantial budget cuts in D.C. will have an impact on the recovery. Let’s look at some more specific estimates in the auto industry.
As refunds from tax returns hit consumers’ pockets, automakers could see a potential boost in March sales. My friend recently gave up his clunker and used his tax return to put a down payment on a new truck. I’m guessing that there are many more consumers doing the same thing. Backing up my thesis is Alec Gutierrez, senior market analyst of automotive insights for Kelley Blue Book.
“Sales will be boosted by record low interest rates and a slowly improving job market, which recently saw the unemployment rate and new unemployment claims fall to five-year lows,” Gutierrez said. “In addition, with attractive financing and ample inventory to choose from, many people receiving tax refunds will use their returns toward a down payment on a new vehicle this month.” That’s good news for investors hoping that March will end the quarter strong for earnings reports.