Will Auto Stocks Take You Miles?
Although uncertainty around global economies continues to haunt investors, the automobile users continue to show some signs of positive sentiments across the world. KPMG, in a recently conducted survey, found the automotive industry executives less optimistic about the economy in the short term, though they remain positive about the industry for the year ahead.
What's affecting the industry?
Intensifying competition among the global auto majors has added up to new pressures as the companies strive to capture the market share by offering competitive prices. Moreover, volatile commodity prices and increasing crude oil prices have significantly added to the cost of manufacturing, affecting profit margins for automobile companies. Ford Motors (NYS: F) reported pre-tax operating profit of $1.9 billion, or $0.46 per share in the third quarter, a decrease of $111 million from the third quarter in 2010. Similarly, the net income for General Motors (NYS: GM) decreased by $55 million in this year's third quarter versus the same quarter last year.
As the global automobile industry is going through this most critical time, Toyota Motor (NYS: TM) is on a losing streak, struggling to maintain its reputation as a quality carmaker. After recalling 1.7 million Toyota and Lexus vehicles in January for defects in fuel pipes and pumps, pressure sensors, and spare tire carriers, 2.17 million more cars had been recalled in February for carpet and floor-mat flaws that could jam gas pedals. The company yet again recalled 550,000 vehicles worldwide early this month for a potential steering flaw.
What's keeping the market afloat?
In this highly competitive space, there's no room for error. Changing business models and new technologies are inviting fresh entrants to the industry. So it's important that the existing companies focus on improving manufacturing efficiencies and invest in product development.
To that end, General Motors is planning to sell 1.4 million vehicles in South America in 2015, outlining the solid growth. Ford, on the other hand, is planning to invest $1.1 billion at its Kansas City plant for the production of the Transit commercial van.
Auto manufacturers are also benefiting from emerging markets. Brazil, China, and India saw growth in the automotive market of 14%, 26%, and 12%, respectively, per year from 2004 to 2009. These markets have high demand for light vehicles and are expected to continue growing in the future.
The outstanding players
In my opinion, two emerging automobile stocks outplay others in the industry in terms of a long-term investment strategy.
Tata Motors (NYS: TTM) , the India-based automobile manufacturer, has reported sales of 68,000 commercial and passenger vehicles worldwide in October 2011, up 5% over the same quarter last year. Analysts expect a rise in revenues for the company in 2012, helped by its investments in Nano, the world's most inexpensive car, as well as its Jaguar and Land Rover brands, purchased in 2008.
Silicon Valley start-up Tesla Motors (NAS: TSLA) could also be a long-term winner. It focuses on technologically advanced battery-powered electric cars. So far, the company has been selling Roadsters, two-seater electric sports cars costing $109,000, to high-end customers. Due in mid-2012 is the more moderately priced Model S sedan. The Model S has a base price of $57,000, and the base model will have a range of 160 miles when fully charged. There are also optional battery packs with ranges of 230 and 300 miles.
Foolish bottom line
Though dark clouds hover around the global economy, the automobile industry is among the few industries seeing a bit of sunshine. Investors need to be cautious while stepping into this sector, but aside from the obvious names like Ford, there are a few dark horses that could be primed for success. I'm keeping my eye on both Tata Motors and Tesla Motors as long-term plays.
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At the time this article was published Stanley Ross does not hold shares in any of the companies mentioned in the article. The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of Tesla Motors, General Motors, and Ford Motor. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.