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By Jeremy Glaser | 01-07-2011 04:10 PM

Auto Recovery in Progress but Still a Long Way to Go

Restructuring during the crisis has left auto manufacturers well-positioned to benefit from the recovery in auto sales, say Morningstar's Dave Whiston and Rick Tauber.

Jeremy Glaser: For Morningstar.com, I'm Jeremy Glaser. With the North American International Auto Show getting ready to kickoff in Detroit, I thought it would be a good time to sit down with Senior Equity Analyst, Dave Whiston and Senior Credit Analyst Rick Tauber to see the state of the automotive industry and how their balance sheets are fairing?

Gentlemen, thanks so much for joining me today.

Dave Whiston: Thanks.

Rick Tauber: Thank you.

Glaser: So, Dave, could we just take the big picture view of the auto industry? How did sales look towards the end of 2010 and what's your view of sales going forward in this next year?

Whiston: Well, for a long time now I've been very optimistic about the recovery in U.S. autos and the December sales, U.S. new light-vehicle sales that came out recently confirm that. December is actually the best month of the year. We had a seasonally adjusted annualized selling rate or SAAR jumping all the way up to 12.6 million and that's a great sign.

We still have a long way to go though. Just to me, replacement demand for example, you need to get to about 13.2 million, 13.5 million. So, we're still below replacement demand which tells you there is still a long way to go for a recovery. Normalized levels are probably between 16 million, over 17 million, but I'm very optimistic about the fact that the worst is over. For 2010, we were at 11.6 million versus 10.4 million in 2009, so the recovery has already started but there's a ways to go.

Glaser: Would you expect that 2011 would see a sharp jump up or you expect some more gradual ramp up to that real replacement level?

Whiston: The cadence of that recovery is, what every – you know whether you're an analyst or an auto executive, everyone is trying to figure that out and I'm looking for 13 million in 2011. I have seen some other numbers as low as 12.5 million which is obviously still up from the 2010 levels, but I've also seen numbers as high as 14 and 15 million. So, I think everyone agrees we are going up, it's just a matter of how steep is that slope.

Glaser: So, what manufacturers are in the best positions to take advantage of this increase in sales?

Whiston: Well, I think it benefits everybody because ultimately auto manufacturing is a volume game. For investors, I'm looking for more of our cheaper 4-star stocks. We don't have any 5-stars right now in the OEM space, but GM, Ford, Toyota and Daimler are my personal favorites.

Glaser: Are there any companies that you think aren't tooled to compete right now, maybe don't have the products out there or don't have the consumer awareness of their new products?

Whiston: Not really. With the major restructurings and bankruptcies we had, the weak players all went into Chapter 11 and reorganized and some of the really weak suppliers just flat out liquidated. Obviously, GM and Chrysler's bankruptcies are well documented, but whether you agreed with those bailouts or not they're done, it's over with, it's time to move on and the future for GM in particular of those two looks really bright.

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