U.S. auto sales spiked in March, a good sign for the improving sector. Auto sales were estimated by LMC Automotive to have risen by 6% to a four-year high. The firm also predicted that sales would continue to improve throughout the year and that some automakers could reach all-time sales records. Chrysler reported a 34% increase in U.S.-based sales in March, while competitors General Motors (GM) and Ford (F) also reported increases of 12% and 5%, respectively. General Motors moved down on the news while Ford moved up, but both stocks are ready to trend higher.
March was Ford's best month in five years. Monthly sales reached 223,418 vehicles, a 5% improvement from last month. Sales in four of Ford's top-line models increased to new highs, including the Fusion, Focus, Edge and the F-series pickup trucks. The company has increased sales by 9% in the first quarter of 2012, a continuation of the trend in car sales started last year.
Ford has been improving sales and gaining market share since last year, but the stock price does not reflect this yet. The stock has been trading between $12 and $13 for more than three months, and is only valued at 6.5 times earnings.
Signs of growth in the U.S. auto market is a reassuring indication of an improving economy. However, it would be nice to know if people are merely taking advantage of low rates and great deals to replace old vehicles, or if the market is really back for a sustainable period of time. Subprime buyers helped drive the new sales figures, drawn by deals not available to them since the financial crisis.
There is other good news too, news that supports the strengthening trend in U.S. auto sales. The final number for fourth-quarter GDP held stable at 3%. There were 243,000 jobs added in January, and other unemployment statistics are still trending down. The four-week moving average of initial claims, the number of continuing claims and total claims all continued to trend down.
Initial jobless claims data were getting rosy until revisions to the week ending March 17 put a stop to what was shaping up to be a nice downward trend in initial unemployment claims. Now, with the revisions it looks as if layoffs and job losses are beginning to bottom out and there is a renewed risk that unemployment could rise from four-year lows. A rise in unemployment could derail the trend in car sales.
Ford is ready to move higher. I think the stock is ready to explode to the upside. The question is what will be the catalyst. The company should be releasing earnings in the next month and that could be it. The stock could easily gain 15%-25% and trade in a range between $15 and $16 dollars. The dividend, around 1.5% at the current prices, comes as an added bonus.
General Motors is doing well too, seeing strong improvements since it emerged from restructuring. The company's March sales improved by 12%, led by small cars and crossovers with over 30 miles per gallon. The total sales of all General Motors passenger vehicles increased by 22% in the month. CEO Daniel Akerson seems to be getting the company under control, but it is still carrying some dead weight. Sales of Buick and Cadillac both fell by more than 13% in March. The two brands only represent a small percentage of General Motors' sales but remain a drag on improvements.
I do expect to see a continuation of market leadership from the company. It is scheduled to unveil a number of redesigned vehicles during 2012 and expects to have updated vehicles in 60% of market segments by year-end. Continued competition with foreign and domestic automakers will help the entire industry improve. Competition is good for business and is what's bringing the U.S. auto market back.
Both companies have been improving in overseas markets, despite worries of slowing global growth. General Motors set another February sales record in China by selling over 240,000 vehicles. This was a 30% increase from February last year. Ford Export and Growth Director Hal Feder recently reported that the Export and Growth segment set an all-time monthly sales record in February 2012 and continued a 15-month streak of new records.
General Motors stock has been trading in tight range over the last three months, just like Ford. Currently trading around $26, the stock is building support and looks as if it is ready to move to the upside as well. Shares of General Motors could easily gain $6-$7 and trade in the range between $32 and $35. The company comes with a caveat Ford does not: The government still owns a large chunk of the company stock and will be a seller when the price moves high enough.
Asian-based competitor Toyota Motors (TM) also increased its U.S. sales in March. The company increased sales by over 15% but failed to meet analyst expectations. Consensus estimates expected a gain of 21%. March marked the first time since 2008 that Toyota sold more than 200,000 vehicles in the U.S. Toyota stock is trading around $86.50 and looks extended. The market in this stock is thinly traded and is not as good a choice to ride the improving U.S. market. The stock is grossly overvalued at 56 times earnings compared to Ford and General Motors, which are both valued around 6.5 times earnings.
Nissan Motor (NSANY.PK) reported a 12.5% increase in March sales and set a company record. Sales were helped by incentives that helped draw buyers into the market. Nissan is trying to sell off its remaining Altimas in preparation for the release of an updated version scheduled to be released in July.
German automaker Volkswagen AG (VLKAF.PK) reported that sales rose 35% in the month and broke a record last set in 1973.
The data clearly show that the U.S. auto market continues to improve. The trends in sales that began last year are expected to continue this year. The stock of U.S. automakers is undervalued compared to earnings and is poised to rise. I think that Ford is the clear choice to ride this market. Ford is undervalued compared to the Japanese automakers and insulated from the European debt crisis, unlike German-based Volkswagen. Ford is stronger than General Motors, simply because it was able to restructure and regain its competitive edge without any government assistance. General Motors carries the stigma of bailout money and bankruptcy. The effects of the bailout will impact General Motors' price until the government sells it shares in the company and long after. Ford, unlike General Motors, also pays a dividend, which adds a little extra to the trade. Both companies are going higher; Ford is just a better choice.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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