June Auto sales hit a level last seen at the start of the deep 2007 to 2009 recession. Resurgent sales, however, have been good news for industry bellwethers like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), and upstart Tesla Motors Inc (NASDAQ:TSLA). What’s less certain are the investment merits of U.S. auto stocks.
A Steep Decline
The U.S. auto industry was among the hardest hit sectors of the economy during the recession. General Motors Company (NYSE:GM) and Chrysler both took government bailouts and still had to restructure in bankruptcy court. In fact, General Motors Company (NYSE:GM) has only been a publicly traded company again since late 2010.
The recession reduced the availability of credit and led to a general fear among consumers for taking on debt. These were unusually weighty issues during the 2007 to 2009 recession. That’s a bad combination for an industry that sells large and expensive products using loans.
And it’s been a slow climb out of the hole. That said, automobiles wear out, so avoiding a new car can only last just so long. As customers have come back into the market, sales have clearly shifted back into growth mode.
A General Laggard
General Motors Company (NYSE:GM) shares are again trading at about where they were when they came public again, but in between experienced a bruising decline of about 40%. With such a short history, the company’s historical top and bottom lines aren’t much of a guide. That said, investors are clearly excited about the recent vehicle sales trends.
The only problem is that General Motors Company (NYSE:GM) has been something of a laggard on the sales front compared to Ford and Chrysler, which still hasn’t come public yet (it’s controlled by Fiat). For example, General Motors Company (NYSE:GM)’s sales rose 6.5% in June compared to Ford Motor Company (NYSE:F)’s increase of 13%. Moreover, the top-line was actually down year-over-year in the first quarter after a fairly strong second half in 2012.
Recovering from a 40% decline translates to an advance of around 75%. GM shares may interest momentum investors chasing improving U.S. auto sentiment, but most should probably avoid them for now.
Improving Image
Ford Motor Company (NYSE:F) was the only major U.S. auto maker to avoid bankruptcy, but that’s a mixed blessing. For starters, the company’s image has improved immeasurably. However, it is still saddled by many of the legacy costs that GM and Chrysler were able to unload in bankruptcy court. While union deals have brought many costs more in-line with peers, the company still has a notable debt load. Long-term debt accounts for over 80% of its capital structure; that figure is less than 25% at GM.
Still, Ford Motor Company (NYSE:F)’s June sales easily trumped GM’s and also bested Toyota, Honda, and Chrysler. While a single month doesn’t make a trend, Ford Motor Company (NYSE:F) has been posting solid sales all year. The recently released second quarter earnings underscore its success.
Ford Motor Company (NYSE:F) shares have also seen a notable price advance in recent months. However, with a price to earnings ratio of around 12, a renewed brand image, and industry leading sales results, it looks better positioned to continue a rebound than GM. Moreover, the company just doubled its dividend, a sign that management believes the company is getting back on track. Investors looking for a U.S. auto play should take a look.
Way, Way Too Expansive
Of course the biggest story in the auto industry lately has been Tesla Motors Inc (NASDAQ:TSLA). The company makes only electric cars. After building an expensive showcase racer, it has begun to sell vehicles that people would actually drive on a regular basis. With price tags closing in on $100,000, the cars aren’t cheap, but enough customers have bought them that the start-up finally turned a profit in the first quarter.
The shares are up around 250% so far this year based on that single fact even though the company still faces big headwinds. For example, it had to scrap a lower-cost model due to lack of demand. And it’s planning to build recharge stations across the country to ensure that there’s an infrastructure to support its vehicles. That’s an expensive proposition that could easily push the company back into the red, but one that it has no choice but to undertake since no one else is lining up to do it.
Equally concerning, Tesla Motors Inc (NASDAQ:TSLA) recently stopped reporting its sales backlog. That leaves very little clarity to future sales for a new company selling new technology. Even if Tesla Motors Inc (NASDAQ:TSLA) puts up a couple of solid quarters, it’s hard to justify the share price advance. Investors should stay away.
A Rebound In U.S. Autos
The U.S. auto industry is a shell of its former self. Ford appears to be the best positioned U.S. automaker right now from an investment standpoint. While GM and Tesla Motors Inc (NASDAQ:TSLA) are both doing well, their shares have moved too far too fast based on their underlying businesses. Investors should steer clear.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of Ford and Tesla Motors . Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article U.S. Auto Industry Continues to Rebound originally appeared on Fool.com is written by Reuben Brewer.
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