I like cars – at least as much as the average red-blooded American male. And I like driving, both skillfully and fast. Like most people, I believe I’m a better-than-average driver. I’ve even taken advanced driving classes and driven at New Hampshire International Speedway in my own car on three occasions. It was great fun, and I think I learned some lessons that are useful in real life too.
But cars are terrible investments; they lose 15% to 20% of their value every year. Everybody knows this, yet people buy new cars because they want the newest styles, the newest features, etc.
The smartest way to own a car is to buy a high-quality car after it’s two years old, and then drive it for about a decade, or until the repair bills become onerous. But that can be boring.
What about buying a car that’s so special that it’s immune to the laws of depreciation? It’s harder than you might think. I’m looking at a car magazine, one that regularly reports the results of important auctions, which recounts the recent auction of a 1988 Chevrolet Corvette, 35th Anniversary Edition, with white paint, white leather seats, and white wheels. When new, the car sold for about $33,000. Only 2050 were built. The buyer figured that relative rarity, plus the fact that it was a Corvette, meant that it would be a good investment. So for 20 years, he treated the car with care, driving it a total of 9,000 miles. And what did it fetch at auction? $29,160 … and those are less-valuable 2007 dollars.
Figure in insurance, licensing, taxes and garaging costs, and it only looks like a “less bad” investment than other cars.
So let’s look at car companies themselves. The beauty of auto stocks is that aside from the small commission, there are no extra costs: no licensing, no excise tax, no insurance, and no storage costs. And if you pick a good one, there’s the prospect of appreciation.
But are there any good auto stocks? Following is a complete review of every public automobile company … from worst to best … in my opinion.
Nissan (NSANY) is having its lunch eaten by Toyota. Revenue growth has slowed dramatically in recent years, profit margins have shrunk, and the stock has been underperforming the market for four years.
Ford (F) – known when I was young as “Fix Or Repair Daily” despite their excellent Mustangs – is being killed by legacy costs, and everyone knows it. The company sold $164 billion of cars (and financing) in the past twelve months, but the market says the company is worth just $16 billion. So by some measures, it’s a screaming bargain, but only if the company can find its way back to profitability, and that’s a task for a highly innovative, charismatic, and hard-hearted manager … not William Clay Ford, Jr.
This auto stock fell from 41 in 1999 to 6 last July, and since then (when the dividend was killed) the stock has been acting a little better than the broad market.
General Motors (GM) is also cheap. Revenues are $190 billion and the market says the company is worth $19 billion. From its 2000 high of 95, GM fell to a low of 19 at the end of 2005, and since then it’s beaten the market modestly. But earnings estimates have been cut for both 2007 and 2008, and the stock has been weak for most of this year.
Honda (HMC) is half the size of GM, but it’s got a fine track record of growing both revenues and earnings and its chart has a healthy long-term uptrend. Still, this auto stock has only equaled the market’s performance over the past five years, and this year it’s down some 20%.
Toyota (TM) is the most expensive major carmaker in the world, measured by price to sales ratio. And that’s because it’s so highly regarded. The company just surpassed GM as the world’s largest automaker, it grows revenues and earnings regularly, and its stock, while down 19% this year, is on a long-term uptrend. Trouble is, it’s performed no better than the broad market over the past twelve years.
DaimlerChrysler (DAI) will soon be Daimler again, as the nearly ten-year union of the German and American companies ends. The stock sells at just 58% of annual revenues of $161 billion, and it’s in an uptrend, so it’s probably a decent investment here.
Tata Motors (TTM) is an old Indian brand, and it’s a piker compared to those big guys above; second quarter revenues were just $1.9 billion (or 76 billion rupees). But that was 28% more than the year before, so this is a real growth story! The stock came public in 2004 at 9, ran as high as 22 this past January, and is now 23% off that peak. It’s not as cheap as the preceding companies; it sells at 86% of revenues and the P/E ratio is 13. But it’s got great growth prospects, as India modernizes its road system and middle-class Indians move up from bicycles and scooters. I see it as an attractive buy for long-term speculators.
Volkswagen (VLKAY) is unlike any other car manufacturer here in one important way; its stock is hitting new highs! For growth-oriented investors, that’s the most important factor of all. Both revenues and earnings are on growth tracks at this company, and a main reason is the company’s success in the emerging markets of Brazil, Russia and China. In fact, Volkswagen is the most successful foreign automaker in China; it controls about 17% of the market, and that market is the company’s largest, outside Germany. In short, I like it.
I would like to write about a Chinese automotive stock, but there are none available. Chery is planning to work with Chrysler at getting its cars into the U.S., maybe by late next year, but its stock isn’t traded on U.S. exchanges. Brilliance China was traded on the NYSE until July, but then its flagship model, renamed BS6, failed crash tests in Germany (you can see it on YouTube) and the stock delisted from the NYSE because of low trading volume.
Interestingly, prior to the recent auto show in Frankfurt, Chinese carmaker Shuanghuan Automobile was accused of producing cars that are too similar to BMW’s X5 sports utility vehicle and Daimler’s Smart Fortwo. Both European companies, in fact, threatened legal action.
As a result, Shuanghuan did not show the Smart-like Noble, but did show the X5-like CEO, which is already being imported through Italy and is currently available throughout Europe for about three-fourths the price of an X5.
Conclusion: If I had to buy one auto manufacturer, I’d buy Volkswagen. But I’m excited about the prospects for Tata, and when Chinese auto companies come public I’ll look carefully at them. Finally, I’m tempted by the bargain prices of old Ford and General Motors, but when I remind myself of their troubles I find it easy to walk away.
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Note: The origin of the word “automobile” is self-explanatory, though logically it might as well apply to any self-powered vehicle, from a motorcycle to a speedboat to Boeing 777.
But where did the word “car” come from?
Its roots are in the Latin carrum, originally a two-wheeled Celtic war vehicle. Its cousins are chariot, carriage, and cart.
Interestingly, the first recorded use of car-sick dates to 1908. But I’m betting it was used plenty earlier, especially considering the state of those Celtic roads.
Last, but not least – there’s one more automobile stock that’s public, but you won’t find its vehicles on any highways.
It’s Zenn Motor Company (4ZNN). The name stands for Zero Emission No Noise), and if you’ve got your thinking cap on you’ve probably guessed that means it runs on batteries. Correct.
The company’s two-seat vehicles have a regulated top speed of 25 MPH and a range of 35 miles. Recharging is accomplished by plugging in to a normal 110 V outlet overnight. Suggested retail price runs from $12,500 to $14,995. And the current market is master planned/gated/retirement communities that welcome the low speeds, the quiet and the zero emissions. Could the market be much bigger than that someday?
But this company is tiny! Second quarter revenues were $0.1 million, down from $0.7 million in the first quarter. The loss was six cents per share.
Analysts (well, there’s a least one) are projecting a profit of a penny per share for ZENN in 2008 and this car stock is now in an uptrend … sort of. As I write, it’s corrected from a high of 5.4 in June to a low of 3 in August, and now it’s working its way back.
But – and this is important – ZENN is very thinly traded. Average daily trading volume is just 49,000 shares. The stock is traded on the Toronto Stock Exchange and on the pink sheets; simple signs that risk is very high.
If you’re interested, do some digging for yourself. I’m not recommending the stock and I won’t respond to any emails that ask about the company or the stock. It’s just too speculative for me.
But I write about it because, well, I like cars, and obviously there’s a market opportunity for non-polluting vehicles.
The trouble is, this is an extremely competitive industry and there’s no question that management at Zenn has far less experience than management at the big companies. But I’ll keep an eye on it from time to time as the months pass.
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Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
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