How Greater Efficiency Drives Up Auto Stocks' Returns
The auto industry has lost 30% of its workforce since 2005 ... but it's only producing 11% fewer cars. This extra efficiency has boosted automakers' returns, and could do the same for these innovative companies' investors.
The number of cars and light trucks U.S. consumers purchase annually has increased 5.7 million since 2009 -- from 10.4 million then to an estimated 16.1 million as of this past August (on an annualized basis). That's still below the 2005 peak of 17.5 million vehicles, but it nonetheless represents impressive growth. .
The combination of increased efficiency and greater demand helped Ford (NYSE: F) post $4.77 billion in EBITDA in the first half of the year in North America. Ford now plans to expand its production in several creative ways that don't require enormous amounts of money, buying it time while it builds new capacity to take advantage of the recovery. General Motors (NYSE: GM) isn't far behind, trying to recoup from a government takeover and massive losses in Europe. Let's see how each company's ramping up to meet demand.
Back in 2006, Ford put up nearly everything it had left as collateral to receive a $23.5 billion loan to restructure the company, which enabled it to not go bankrupt. Now Ford is at it again, increasing production in multiple ways to meet the surge in demand.
First, Ford will boost production simply by expanding capacity. According to its website, Ford will grow its North American capacity by 200,000 units this year by adding more workers and shifts. It similarly boosted production by 400,000 units last year.
According to Ford, "Approximately 75 percent of our plants are running at a three-crew, three-shift or four-crew pattern in order to ensure we're getting more of our products into dealerships".
Ford has also boosted production by idling its plants for only one week during the summer versus the traditional two. This increased production by another 40,000 units without having to spend millions on a new plant or additional capacity at another plant.
Ford is seeing most of its increase in demand coming from light trucks, with sales up 14% this year to 958,584 according to Motor Intelligence (click on New Vehicle Sales). One source of this increased demand is from the rise in the US housing market. Housing starts were up 20.9% in July, which means there is more demand from home builders for trucks to move materials to and from a construction site.
Ford saw its sales of cars rise by 10.9% to 472,853 so far this year. This enables Ford to diversify its growth away from just trucks, whereas companies like General Motors are very dependent on its trucks for sales growth. Overall Ford has seen a 12.9% rise in car and light truck sales this year.
Ford isn't the only company seeing strong sales and profit growth. General Motors is becoming an economic powerhouse once again, as light truck sales work wonders for the company.
GM made $3.4 billion in EBITDA in North America for the first half of the year. Sales of light trucks are up 13% this year, while sales of cars are up 3.4% for total sales growth of 9.1%.
One advantage Ford has over GM is that Ford is seeing strong unit growth in both the light truck and car markets, while GM is leaning heavily on its truck sales to boost sales growth. The rebounding construction industry will help buoy truck sales, but you never want to be dependent on just one thing. Just look at the SUV boom and bust.
In contrast, one advantage that General Motors does have over Ford is that GM sells light trucks and cars in a roughly 4-to-3 ratio, a more equal distribution than Ford's roughly 2-to-1 ratio.
Furthermore, GM's better able than Ford to cut its ties in Europe. In GM's Q2 2013 earnings report, it was able to lower its European loss to $110 million, from $200 million in the previous quarter.
GM has been idling factories and reducing output in Europe, including plans to convert a plant in Bochum to a parts production and logistics unit with less workers.
For all of 2012, General Motors lost $1.8 billion in Europe, but it looks like it will be able to reduce that significantly this year. General Motors doesn't have to make money in Europe -- it just has to lose less money so it doesn't bog down great results in North America.
Ford wasn't quite as lucky as GM, losing $348 million in its latest quarter (less than the $404 million it lost last year) and guiding for a loss of $1.8 billion in Europe for 2013.
This is better than the $2 billion loss management had previously guided for, and similar to the loss in 2012. Ford needs to clamp down on European losses faster or it will continue to weigh heavily on North American results.
In 2014 one of Ford's plants in Genk, Belgium will shut down, with workers walking away with severance pay. This will greatly reduce Ford's operating loss, especially when you factor in the cost savings from two of its UK plants shutting down.
Both Ford and General Motors have advantages and disadvantages over each other as far as investment opportunities go, but Ford is still my favorite in this space. With US auto sales rising and costs coming down due to less workers on the payroll and more efficient plant operating timetables, Ford is worth a closer look.
The article How Greater Efficiency Drives Up Auto Stocks' Returns originally appeared on Fool.com.Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.