Kia Motors Corp. (000270), once an underdog in an industry dominated by General Motors Co. (GM) and Toyota Motor Corp. (7203), is giving investors a smoother ride with the best risk- adjusted returns in the past five years.
The BLOOMBERG RISKLESS RETURN RANKING shows Kia provided a risk-adjusted return of 9.2 percent in the five years through yesterday, the most in the Bloomberg World Auto Manufacturers Index (BWAUTM) of 22 car companies. Hyundai Motor Co. (005380), the larger affiliate of Seoul-based Kia, rose 4.8 percent in the same period by that measure, the second-most in the index. Kia and Hyundai’s shares had the lowest volatility among automakers based in the emerging markets, and Kia posted higher absolute returns than all of its rivals.
Kia, maker of the Optima sedan, and Hyundai have challenged Japanese and American carmakers by improving quality, design and fuel efficiency, which helped spur share price increases of 32 percent and 23 percent, respectively, in 2011. The South Korean companies have expanded beyond their local market and increased their combined U.S. market share to a record 8.9 percent in 2011, according to auto-researcher Edmunds.com. Robust U.S. demand will drive more stock gains for the companies this year, KDB Daewoo Securities analyst Michael Yun and Shin Young Securities analyst Hyung-sil Lee said in reports last month.
“You can correlate their success in the showroom in the U.S. with their stock performance,” Kevin Tynan, an auto analyst with Bloomberg Industries, said in a telephone interview.
The risk-adjusted return is calculated by dividing total return by volatility, or the degree of daily price-swing variation, giving a measure of income per unit of risk. The returns aren’t annualized. Higher volatility means an asset’s price can swing dramatically in a short period of time, increasing the prospect for unexpected losses.
Hyundai, maker of the Sonata and Elantra sedans, is Kia’s largest shareholder, according to data compiled by Bloomberg. Both companies have the same chairman, Chung Mong Koo.
Kia and Hyundai’s shares had lower volatility than Chinese automakers BYD Co. (1211), Dongfeng Motor Group Co. (489) and SAIC Motor Corp. (600104), and Tata Motors Ltd. (TTMT) of India. While both South Korean carmakers had bigger price swings than companies such as Germany’s Bayerische Motoren Werke AG (BMW), Japan’s Honda Motor Co. (7267) and Toyota, risk-adjusted returns for Kia and Hyundai benefited from a higher total return.
Kia and Hyundai had half the price swings of Mumbai-based Tata Motors, the most volatile stock in the rankings, according to data compiled by Bloomberg.
Smaller-than-average price swings for automakers such as Toyota came at the cost of lower returns, according to data compiled by Bloomberg. Toyota, which had the worst returns when adjusted for volatility after the measure declined 1.5 percent over the past five years, also had the poorest share performance. Toyota fell 55 percent over the past five years.
The U.S. economic recovery, price-conscious consumers and weak European and Asian sales roiled auto stocks last year, increasing price swings. The Bloomberg World automakers index fell 21 percent in 2011, the worst return since 2008, when it slid 47 percent.
Volatile Auto Stocks
“While volatility can create opportunity, the inherent cyclical nature of the auto industry appears to make investors overreact,” Efraim Levy, an analyst for S&P Capital Equity IQ in New York, said in a telephone interview. “In recent years, additional pressures such as the bankruptcy of major players including GM exacerbated the situation.”
Kia gained 19 percent to 68,500 won in the 12 months through Feb. 28. Hyundai is up 17 percent to 208,500 won.
Kia’s share of domestic and international markets and its revenue have grown at a “somewhat faster pace” than Hyundai, according to a Feb. 23 report from Standard & Poor’s credit analyst Sangyun Han in Hong Kong.
Kia and Hyundai’s stock gains may be limited as they face more competition from automakers galvanized to win back buyers. Signs also point to slower car sales growth in the U.S. and a weaker market in Europe.
That and efforts by competitors to win back market share may limit growth for both companies in coming years. Global auto sales may decline 3 percent this year as demand ebbs from the U.S. and China after two years of increases totaling 17 percent, according to estimates from Tynan of Bloomberg Industries.
In January, Kia forecast that sales volume will rise 9.5 percent in 2012, compared with 19 percent last year.
“It’s easier to come from behind,” Jessica Caldwell, a senior analyst with Edmunds.com of Santa Monica, California, said in an interview. “It’s harder to stay there. They not only have been noticed by consumers but by competitors. You can bet Honda, Ford and Toyota aren’t going to be sitting back and letting them take their customers.”
Part of Hyundai’s strategy will be to press ahead in developing markets, Frank Ahrens, director of global public relations for Hyundai Motor (2741356), said in an e-mail.
“Before the term BRIC became fashionable, Hyundai launched a global management plan to establish manufacturing plants in the world’s major emerging economies,” Ahrens said.
Scott McKee, a spokesman for Kia’s U.S. sales division in Irvine, California, said the company is “thrilled with the success we’ve had, but we still have a long way to go, in terms of market share.”
Kia and Hyundai have benefited by offering stylish models that appealed to price-conscious consumers, said Levy of S&P. Hyundai and Kia’s 100,000-mile, 10-year warranty and Toyota’s safety issues also helped. Toyota recalled millions of cars and light trucks for flaws linked to unintended acceleration.
Hyundai’s gross margin in the latest quarter was 25.8 percent, meaning they were able to turn every $100 of sales into $25.8 in profits after subtracting certain costs, according to data compiled by Bloomberg. That’s the best performance after Scania AB. (SCVB) Kia’s gross margin was 24.5 percent, compared with a median of 18.9 percent for the group, the data show.
Hyundai and Kia increased average transaction prices by 14 percent and 10 percent, respectively, last year from 2006, according to Edmunds.com. Hyundai’s average customer incentive, which includes cash paid back to customers and financing deals, fell 41 percent to $881 last year from 2006. Kia’s declined 32 percent to $1,473.
“That’s a good sign that buyers are gaining more confidence in these brands,” Tynan said. “They’ve got pricing power.”
Hyundai, legendary in the 1980s for rust-ridden clunkers, ranks highest this year among 33 brands in customer retention, beating Ford, Honda, Mercedes, Lexus and Cadillac, according to a survey by J.D. Power & Associates of Westlake Village, California. Kia was No. 5. The study surveyed 117,000 new vehicle buyers and lessees last year and was issued on Jan. 11. Hyundai’s Elantra won North American Car of Year at the Detroit auto show in January.
“There’s lots of room for us to grow,” John Krafcik, chief executive officer of Hyundai’s U.S. sales unit, said in a Feb. 3 interview in Las Vegas. “We’re still a relatively small player in this market.”
Krafcik said Hyundai is sticking to the long view the company has taken since exporting its first car to the U.S. in 1986. Hyundai’s market share gains in the U.S. over the past 25 years were extremely slow, he said.
“We just for the first time in 2011 delivered a market share of over 5 percent,” he said. “We’re not looking as much at maximizing next year’s or this year’s sales opportunities as we are building a foundation for future growth,” Krafcik said.
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