Automobiles & Components (25-10) The program was described by President Obama as, States and Europe has spurred US automakers and parts
United States “more successful then they could have ever imagined.” suppliers to increase their presence in emerging
Industry Type Cyclical Auto companies received a huge influx of needed markets. China's auto production is predicted to
Key Indices: S5AUCO revenue as a result. advance from more than 2.0 million cars in 2001 to
Recommendation: Hold around 14.6 million by 2013.
Top Picks: 2. Hybrid cars are the future. Some of the companies
(Toyota, Honda, etc) have great hybrid cars in place 2. Competition is fierce. As more producers enter new
Description and Summary: that are currently for sale in the market and sales are markets around the globe, competition escalates
The automobiles & components group of the consumer doing well already. This trend will certainly continue worldwide. As a result, fuel-efficient hybrid electric
discretionary sector includes the auto components as gas prices and air pollution remain issues. vehicles have emerged as a strong differentiator. A
industry, covering auto parts and tires & rubber, as well great opportunity that some automakers are trying to
as the automobiles industry. The auto parts industry is 3. While there are several auto companies experiencing take advantage of is emerging markets. Emerging
separated into many divisions, ranging from small financial difficulties there are still other names in this markets, especially China, offer opportunities to
shops to multinational corporations. space that will be attractive as the market recovers. carmakers in terms of both sales in growing markets
and lower manufacturing costs due to lower labor rates.
The automobile industry is engaged in the design, Weaknesses:
production, marketing, sale, and servicing of motor 1. Demand is cyclical and highly seasonal. With a Threats:
vehicles – including light trucks and SUVs, cars, and combination of a weak economy, the housing squeeze, 1. Shrinking supply base. The number of U.S.
motorcycles. Many different companies are involved in higher credit costs, and upside-down loans, consumers automotive suppliers has been steadily shrinking.
production and sales, and these processes require are less likely to purchase a new vehicle than at any Globalization and reduced sales volume from traditional
collaborative efforts. Automobiles are built in factories time in the past decade. Throw in competitive pricing US automakers have contributed to this trend. High
around the world: in North and South America, in and rising raw materials costs, and the auto material and labor costs have hurt the financial
Eastern and Western Europe, and in Asia. The majority manufacturing and retailing businesses are seeing condition of domestic automotive suppliers and has
of competition in the automobiles & components reduced profitability. contributed to a series of bankruptcies.
industry comes from abroad, mainly Europe and Asia.
Only three of ten leading automobile manufacturers are 2. Innovation is crucial. Automakers need to be 2. High gas prices are problematic. Lower oil prices are
from the U.S. constantly investing in the design and development of beneficial but not expected to hold. As the costs of gas
fresh ideas to satisfy consumer demands and continue to add up for consumers, they may be forced
International Competitive Structure: government regulations. If a company has difficulty to evaluate other means of transportation.
The industry is highly competitive, and the foreign- differentiating itself from other manufacturers and does
owned manufacturers are expected to be more not convince consumers of the quality and uniqueness Key Valuation Ratios to Watch:
competitive with the US-owned manufacturers in the of its products, then the devastating outcome will be Along with the traditional valuation ratios PE, EVA,
future. evident on the bottom line. and PB, WACC and ROIC are very important ratios.
Key Items to Watch:
Most of the balance of US car sales went to foreign 3. High fixed costs. The structure of the automobile Seasonally adjusted annual rate (SAAR) of vehicle
nameplates. These vehicles were produced in industry is such that factories, machines, and large work sales, monthly sales reports, days supply of inventory,
“transplant” facilities – foreign-owned plants located in forces need to be in place before the first product is ever consumer confidence, scrap rates and gas prices
North America. In 2008, the top three foreign produced. This is certainly a barrier to entry for new
companies were Toyota Motor Corp (second in US participants to enter the market, and also a negative Return Performance versus the S&P 500 (in %):
sales only to GM), Honda Motor Co. Ltd., and Nissan result if the automaker does not sell all of its 04 05 06 07 08 09YTD
Motor Corp. Ltd. production. S5AUCO -4.8 -34.9 22.4 -7.7 -66.2 10.2
SPX 8.99 3.0 13.6 3.5 -38.5 -0.2
Strengths: Opportunities/Trends: Excess -13.8 -37.9 8.8 -11.2 -27.8 10.0
1. Most recently in the U.S, auto companies 1. Globalization is key. The combination of greater GDP 4.3 3.2 2.9 2.2
experienced a tremendous boost in sales from the “Cash competition, relatively slow growth, and high
Sources: NetAdvantage, Bloomberg
for Clunkers” program instituted by the government. manufacturing costs in the mature markets of the United
BM 415, Fall 2009 Analyst: Eric Olson ericolson32@yahoo.com