The U.S. automobile industry has been on fire lately with new car sales finally coming in at pre-recession levels. While a company like Ford Motor Company (NYSE:F) has been posting stellar numbers, there is another underlying theme pushing those sales up. Cars and trucks on the road today are on average 10.8 years old. This is due to the fact that most cars have become more reliable over the past few years. But, that creates a great opportunity for companies that are looking to give a few nips and tucks to those older vehicles.
A growing industry
Genuine Parts Company (NYSE:GPC) is a well-run company that has been around since 1928. Its long term debt-capital ratio is a very manageable 17%, while its return on assets has been 10% for the past 10 years.
Last year, sales grew 4% to just over $13 billion, and free cash flow is expected to grow another 9% this year. The largest opportunity for this company is how surprisingly small it still is in comparison. The $90 billion aftermarket auto parts business in the U.S. is fragmented into many competitors, and this company only controls a 5% stake. This gives the company a tremendous amount of opportunity for growth, both organically and through acquisitions.
Last year, Genuine Parts Company (NYSE:GPC) purchased 30% stake in Exego Group, an Australian aftermarket parts distributor, and completed the acquisition in April. The company expects that this $1 billion business will be accretive to earnings growth this year.
Genuine Parts Company (NYSE:GPC) is looking for further bolt-on acquisitions in both automotive parts manufacturing and distribution. The company estimates that there will be continued demand and will benefit from the quality of cars increasing over time. Vehicles built today last longer than those built a decade ago, and this increasing supply of out-of-warranty cars is what makes Genuine Parts believe that it can grow by low to mid double digits over the next five years.
Ford Motor Company (NYSE:F) just announced record earnings last quarter, as its first half sales increased by nearly 375,000 vehicles worldwide. This gave Ford an additional $579 million in revenue, or a $0.17 per share boost. Ford’s increased sales meant that its automotive plants were able to run at a more efficient capacity. That increased efficiency lead to an increase in operating margin by 1.3% to 6.4%.
Ford Motor Company (NYSE:F) is continuing to execute on its OneFord strategy to structure its vehicle product mix to use standardized platforms to capitalize on its world wide scale. This will allow the company to better compete in the BRIC countries and other growth markets where price sensitive consumers are driving huge volume growth.
Ford Motor Company (NYSE:F) currently pays out 16.5% of earnings to support a 2.3% dividend. The company decided to de-leverage its balance sheet and fund its pension funds to mitigate risk of an economic slowdown. This conservative move and use of cash will help ensure that Ford will continue to flourish even if global sales start to slow.
Ford Motor Company (NYSE:F) is moving aggressively into China, now the largest auto market in the world. The company is planning on 70% of its global expansion to be in Asia, and for the Asian market to account for 40% of its vehicle sales within the next five years. This will put pressure on the company’s gross margins, but increase the overall profit. This area of the world is the most highly contest by the big automotive companies trying to sell small vehicles. Ford will earn less of a profit on these vehicles than the large trucks it sells in the U.S.
As we see margins decrease at Ford Motor Company (NYSE:F), the company could become more susceptible to a global economic downturn. This is especially true if the Chinese and Asian markets do not continue their upper single digit to low double digit growth.
Betting on electric
Tesla Motors Inc (NASDAQ:TSLA) has seen the sales of its high-end sports sedan boom in the past couple of years. The company reported its first profitable quarter this year, and its stock has been on a tear. The company’s Model S should require less maintenance and traditional replacement parts as the electric motors are the only moving parts in these cars. If this trend continues, we will see fewer hoses, clamps, and other replacement parts needed for older cars.
Today, electric vehicles account for less than 1% of total sales. Their prohibitively expensive up front costs are the biggest contributor to that. As the price comes down, more consumers will be able to purchase these vehicles that come with incredibly low maintenance costs.
Tesla Motors Inc (NASDAQ:TSLA) is running a new business model that seems to be working. It is both manufacturing vehicles and collecting revenue by selling zero emission vehicle credits to companies like General Motors Company (NYSE:GM) that need these credits to continue selling their lower mileage trucks. Tesla is also leasing its drivetrain technology to Toyota Motor Corporation (ADR) (NYSE:TM) for its electric vehicles, creating yet another revenue stream. Tesla aims for a 25% gross margin, which would be the largest of any other automotive manufacturer.
It is hard to compare the businesses of Ford Motor Company (NYSE:F) and Tesla Motors Inc (NASDAQ:TSLA), as the two have very different business models, margins, and clients. Ford is valued at 11.6 times forward earnings, and Tesla, on the other hand, is valued at 22 times. Currently, electric vehicles are estimated to command more than 5% of total vehicle sales by 2017, a five-fold increase. This could mean that Tesla isn’t wildly overvalued, however, competition in the electric vehicle space is heating up, and any missteps could send Tesla’s stock tumbling.
Foolish bottom line
Genuine Parts Company (NYSE:GPC) has been growing earnings steadily, and the trend of older cars on the road looks like it will continue into the future. With a dividend payout ratio of 48% and a healthy balance sheet, this company is looking to reward its shareholders over the long term. Even if electric vehicles do increase their sales five-fold, that means that 95% of the market will still require the clamps, belts, and hoses that Genuine parts provides for years to come.
Wes Patoka has no position in any stocks mentioned. The Motley Fool recommends Ford and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors .
The article Aging Cars Will Need a Facelift originally appeared on Fool.com.
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