After a meeting with a near disastrous fate in 2009, the auto industry is helping lead the U.S. economic recovery. In 2012, an estimated 14.4 million cars were sold, and this figure is estimated to grow to 18 million in 2018. The auto industry typically contributes about 4% of GDP, but the continued recovery has material economic multipliers in job creation and complementary industries. Automakers should reap larger profits, while shareholders should expect higher returns.
Housing recovery is great for the auto sector
A recovering housing sector is one of the largest contributors to the growth of the auto industry in two distinct ways. First, a stable housing market with gradual rising home values helps consumers feel more confident about buying a new vehicle, and an increase in new housing developments and projects increases demand for pickup trucks. This sentiment is echoed by both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), as they mentioned that a stronger housing market has helped sales to small businesses climb by nearly a third.
Both major manufacturers will be launching new truck models, with General Motors Company (NYSE:GM) launching the 2014 Chevrolet Silverado and GMC Sierra. Meanwhile, Ford Motor Company (NYSE:F) is planning a complete overhaul of its F-150 next year.
The obvious choice to buy
Mark Reuss, head of General Motors Company (NYSE:GM)’ North American operations, said that the launch of the 2014 Silverado and GMC Sierra pickups is going well, and that a massive marketing campaign for the trucks will begin in a few weeks once the inventory is in-line to meet demand. The company has invested between $3 billion-$4 billion to develop the new trucks and generate profit of $12,000 or more per vehicle.
Analysts are also upbeat on General Motors, notably Bank of America/Merrill Lynch, which published a note saying that the company will also benefit from new labor terms that have improved its cost structure and capacity utilization in the 90% range. A price target of $56 has been given, which implies plenty of upside at current prices.
The other obvious choice to buy
Ford Motor Company (NYSE:F)’s stock continues to climb to new highs as the company is doing everything right. Sales of its full size pickup trucks and SUVs contributed towards the highest North American profit in more than a decade with more than $2.1 billion in pre-tax profit. With a complete revamp of the F-150 line due out in 2014, it appears that Ford is in complete cruise control in its domestic affairs.
On the international stage, the company is rolling out smaller utilities to more markets worldwide as demand continues to grow. The company’s EcoSport subcompact vehicle will be available in over 60 countries by 2017, compared to 10 now.
Analysts are also positive on Ford Motor Company (NYSE:F), with Citigroup raising their price target to $18 from $15.25 following a meeting with management. Analysts at Bank of America/Merrill Lynch have a higher price target of $24 per share.
The not so obvious choice
The auto industry accounts for a majority of Sirius XM Radio Inc (NASDAQ:SIRI)‘s revenue, and with Sirius Radio becoming a standard feature on virtually all new cars (with a free trial), this is a huge positive as auto sale projections are expected to increase from now until 2018. Sirius has a relationship of over 10 years with auto makers, and is actively working on a strategy for the next 10 years to bring the next generation of “infotainment” services such as weather and gas prices as a hedge against increasing competition from streaming internet services that can make their way into cars in the future.
As a side note, the company is expected to buy back $2 billion worth of shares over the next 12 months, representing around 10% of its total shares. There is also a provision to buy back another $2.5 billion worth of shares in 2014, a move with will undoubtedly drive up the stock price.