America’s oldest car company, Ford Motor Co. (F), and its youngest, Tesla Motors Inc. (TSLA), both reached 100-week highs yesterday, the latest in a long list of signs all pointing to the same thing: the U.S. auto industry is hot.
Ford, founded 110 years ago, closed at $16.84, buoyed by a U.S. auto market on pace for its best year since 2007. Ten-year-old Tesla, which makes $69,900 electric sedans, is joining the Nasdaq-100 Index three years after its market debut. General Motors Co. (GM), which emerged from bankruptcy four years ago today, rejoined the Standard & Poor’s 500 Index last month.
Investors are returning to the resurgent U.S. automotive industry just four years after it wobbled into two government-backed bankruptcies and Ford’s self-financed restructuring. The seven-member S&P 500 Automobiles & Components Index, which includes GM, Ford and parts-makers, is the best performer among 24 industries in the S&P 500 during the last three months, rising 21 percent.
“As autos become bigger and bigger pieces of the indices, it commands greater and greater attention from investors focused on the auto industry and those that are not,” Matt Stover, an analyst with Guggenheim Securities in Boston, said in an interview. “The folks who were sort of indifferent to the sector saw it moving, and now they’re diving in.”
Americans are buying cars and trucks this year at a pace not seen since before the recession. Demand is being fueled by pent-up need, historically low interest rates, and newly competitive compacts and family cars that are winning converts to U.S. automakers. The Detroit Three all gained share in their home market in the first half for the first time in 20 years.
June U.S. light-vehicle sales climbed 9.2 percent to 1.4 million, exceeding the 1.38 million average estimate of 10 analysts in a survey of analysts by Bloomberg News. The industry sales rate surged to almost 16 million, exceeding the 15.6 million average of 17 estimates. That’s the best monthly pace since 16.1 million in November 2007, the month before the U.S. recession officially began, and compares with 14.4 million a year earlier, according to researcher Autodata Corp.
Demand has been broad. Buyers have looked to Ford, GM and Chrysler for pickups, a traditional strength, and also compacts and sedans. Sales of Ford’s Fiesta compact more than doubled last month, GM’s Cruze deliveries jumped 73 percent and Chrysler’s Dodge Dart had its best June.
“Investors no longer view the American car companies as a one- or two-segment industry,” said Itay Michaeli, an analyst for Citigroup Inc. in New York, who has buy ratings on GM and Ford, which closed yesterday at its highest price since January 2011. “They are competitive across all segments, so you have that underlying level of comfort that, if there is a shift to small cars or small crossovers, the American car companies will be players there.”
That all bodes well for Sergio Marchionne, the chief executive officer of Chrysler Group and majority owner Fiat SpA. (F) Marchionne has said he prefers a New York listing after Fiat acquires the remaining 41.5 percent of Auburn Hills, Michigan-based Chrysler. Chrysler’s U.S. sales have gained for 39 consecutive months, making it the Italian automaker’s profit driver.
“Chrysler is going to be an issued stock in the future,” Stover said. “It’s going to demand the attention of institutional investors who will have to have an opinion about whether or not to invest.”
Tesla’s surge coincides with its first-ever profit, reported by Chief Executive Officer Elon Musk in May, that was aided by environmental-credit sales and a one-time savings for early repayment of the U.S. Energy Department loan that helped get Model S into production. The carmaker’s goal is to deliver 21,000 of the sedans this year.
Tesla’s admission to the Silicon Valley-heavy Nasdaq 100 validates the company’s image that it’s as much about technology as transportation. It’s also an apt symbol that traditional cars are also increasingly advanced, with 30 to 50 computers on the average vehicle and an array of devices from GPS mapping systems and satellite radio to smart cruise control that matches the speed of the car in front of it.
Tesla, which closed yesterday at a record $123.45, has said results for the quarter that ended June 30 may not be as favorable, in part because of a drop in sales of California zero-emission credits. Tesla may report a second-quarter loss of 17 cents a share, excluding some items, the average of 13 analysts surveyed by Bloomberg.
Tesla slipped 1 percent to $122.27 at the close today in New York. GM gained 1.2 percent to $35.33 and Ford fell 0.7 percent to $16.72.
Bigger Than Mazda
The run-up in investor demand in Tesla has the shares trading at a price that’s more than 8,900 times the Palo Alto, California-based company’s estimated 12-month earnings, according to data compiled by Bloomberg.
With market capitalization approaching $15 billion, more than that of larger carmakers including Fiat and Mazda Motor Corp. (7261), Tesla is overvalued, John Lovallo, an analyst for BofA Merrill Lynch Global Research, said in July 8 report.
Tesla’s “current share price assumes the company can achieve unit sales equal to multiple times our current volume estimates” and attain a 12.5 percent margin on earnings before interest and taxes, Lovallo said. That requires the company to deliver more than 321,000 electric cars annually by 2020 and do so more profitably than Bayerische Motoren Werke AG, Daimler AG’s Mercedes-Benz, or Volkswagen AG (VOW)’s Audi, Bentley or Porsche, he said.
“While nothing is impossible, particularly with Elon Musk at the helm, we believe these assumptions warrant a healthy degree of skepticism,” Lovallo said.
Back in Time
Skepticism is fair, said Brian Johnson, a Chicago-based auto analyst with Barclays Plc, who has the equivalent of buy ratings on GM and Tesla and rates Ford the equivalent of a hold. What’s tantalizing for many investors, he said, is that it’s a little like being able to travel back in time to invest in Ford or GM in the industry’s earliest years.
“Back in the day, Detroit was Silicon Valley and autos were growth companies,” he said yesterday in a telephone interview.
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