Mon, 7 May 2012
After a few false starts, the auto industry is finally hitting a setback-free recovery in 2012, according to Morningstar's Dave Whiston.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The Wall Street Journal recently named six Morningstar equity analysts Best on the Street. I'm here today with Dave Whiston. He is a senior equity analyst, and he was named the number-one analyst in specialty retail two years in a row.
Dave, thanks for joining me.
David Whiston: Thanks for having me.
Glaser: First off, congratulations on your second year in a row here.
Whiston: Thank you.
Glaser: Let's talk a little bit about your outlook for the industry. Specialty retail includes the auto dealers, which is your prime area of focus. What's happening in the auto industry? Have sales really started to gain attraction again?
Whiston: What we're seeing in 2012 is finally the full and setback-free recovery that I've been writing about for many years. It is finally starting to unfold. We bottomed in the United States at new sales in 2009, the year after Lehman Brothers [went bankrupt], at 10.4 million vehicles sold. And then it went to 11.6 million and 12.8 million last year.
This year we're telling our clients 13.8 million to 14.2 million vehicles. We were originally on the high-end of the forecast, and now I think we'd certainly be bit more on the lower end of the forecast, because we're seeing industry forecasts now coming in at anywhere from 14 million to 14.5 million to as even as high as 14.8 million at some places.
And the reason is, last year, we were actually starting to see that recovery, and then the tragedy in Japan happened, which disrupted the supply chain drastically, especially for semiconductors. And then just as Toyota and Honda we're getting a lot of their production back up to speed there, we had the terrible flooding in Thailand.
So unfortunately 2011 ended up really putting the brakes on the recovery, but we're seeing it really roar back now. Every month sales have been better than the Cash for Clunkers run rate. We're at 14.4 million for an annualized rate in April just recently, for example.
Glaser: Were there winners and losers? Are some companies really doing a lot better while others are still struggling, or has the improvement really been across the board?
Whiston: Last year, the winners were definitely the Detroit Three and Hyundai. And in 2012, we're starting to see a bit more of a rebalancing because the losers last year of course were the Japanese who just didn't have any enough products to sell frankly. They're starting to get their inventories just about up to full-speed now. Toyota pretty much has recovered. Honda will recover at some point during this second quarter that we're in now.
So, now for 2012 we're seeing the age-old problems that auto manufacturing has, which is that it's a very viciously competitive industry. It's very capital-intensive, and everyone now has a great product in all vehicle classes. It's not just Detroit making gas-guzzling SUVs and pickups and ugly small cars. [The Detroit companies] make awesome small cars now.
Some consumers don't believe me when I say that, but you just got to go to either a showroom or go to an auto show and look at something like a Chevrolet Cruze, Ford Focus, Ford Fiesta, and the even on the Korean side look at the Hyundai Elantra. Those are products that can rival a Toyota Corolla and a Honda Civic now. You couldn't have said that a few years ago.
Glaser: It sounds like your 2012 outlook is fairly bullish. For investors who are looking for ideas in this sector, what looks attractively valued now? Where would you put your money to work?
Whiston: I do cover a couple of suppliers, a lot of the automakers or OEMs, and all of the dealerships. The [Wall Street Journal] award was for the dealership category, but ironically I just don't see much value in the dealership space right now. Even modeling some generous margin expansion from beyond current levels, I just don't see any value in that space. Viewers who have watched videos here or read my research before know I'm very bullish on General Motors and Ford, and I still am. I think those stocks are extremely cheap.
There are a lot of legacy issues there, especially in GM's case which gets really complicated with the government ownership. But the company is trading at single-digit P/Es. Normally, with a cyclical company, you would say you don't want to buy a cyclical firm at a low P/E, but these are not peak earnings right now. Remember these guys get most of their earnings from the United States. If you look at their 10-K filings, if you don't believe me, they get most of their money from North America, even if they sell cars all over the world and you hear about China, China, China. They make most of their money in the United States.
[These companies are not at peak earnings right now because the U.S. auto industry] has not come to the full demand level yet. Like I said, we'll probably do anywhere from 13.8 million to 14.2 million, which is our forecast. Maybe we'll get to 14.5 million on the high end, but I think we're still going to 16 million or 17 million units. And when we do that, GM and Ford are going to be printing a lot of money. Operating leverage works both ways. So, I think those stocks are very cheap.
If you believe that eventually the yen will weaken against the dollar, Toyota benefits the most from that, and I think you will see a very positive earnings surprise from Toyota later on in this calendar year, which is the firm's fiscal year 2013. That's because Toyota finally has a lot of products in place to sell, and the volumes have been coming back for Toyota at a very healthy level.
Gentex, a parts supplier that I cover, I think is actually really interesting story and a great way to play this U.S. auto-sales recovery without the legacy burdens of GM and Ford. Gentex's ticker is GNTX. The firm makes auto-dimming mirrors; it has 88% of that market. So, odds are, if you have an auto-dimming mirror in your car, Gentex made it. It makes all of its mirrors right here in the U.S. in western Michigan. It has no debt, no pensions, no unions, and $4 per share of cash and investments on its balance sheet, and the firm generates a ton of free cash flow.
Glaser: Well, Dave, thanks so much for your picks today. Congratulations, again, on the award.
Whiston: Thank you.
Glaser: For Morningstar I'm Jeremy Glaser.