My jaw dropped and I got wide-eyed looking at a chart showing automobile production this year. I simply didn’t realize that automobile plants in North America are operating at full capacity (I mean near 100% in some cases) and are on schedule to sell the 16 million cars they will produce this year. The automobile industry is booming almost more vibrantly than residential housing, and rewarding investors with solid gains this year, while still selling at low forward multiples of earnings. Ford Motor, with the robust Allan Mulally as CEO, has seen its stock rise 25%, more than the market average and still be selling at 8 times forward earnings expectations, when the broad market sells at 16 times current earnings. Warren Buffet’s Berkshire Hathaway picked up 25 million shares of GM in the first quarter on the strength of its making 15% return on equity.
Thanks to my friends at BMO Capital in Canada, I found North American automotive capacity utilization fascinating and optimistic news. When overall industrial capacity is running below 80%, Ford is running at 100%, GM at 80%, Chrysler at 90%, Honda at 103%, Nissan at 98%, Toyota at 99%, Volkswagen at 90% and an assortment of others, 98%. Their 67 vehicle plants are expected to “churn out 16.0 million units in 2013,” according to Alex Koustas, an economist with BMO. That compares with 2005 when it required 85 vehicle plants to produce 15.8 million vehicles. Moreover, America is very near approaching the record number of auto sales in a single year, which was 16.4 million. Talk about a comeback.
There are several bullish developments in place for the resurgent automobile industry. First, the average age of a vehicle on the road is 11 years, meaning that the newest models have far better technology inside, and especially are more efficient in getting mileage per gallon up to 48 miles at only a slight cost premium to older models. This doubling of mileage when gasoline is flirting with $4.00 a gallon is a powerful economic argument for ditching your rusty old bucket and borrowing at record low interest rates to get a new vehicle.
Clearly, most of these domestic and foreign producers must build new plants in the U.S., must hire more workers, both skilled and unskilled, which should translate into economic growth from the industry that powered America in the post World War decades. And here’s another stunning surprise; The Ford Focus became the best-selling passenger car in China in 2012 for the first time. Finally, a miracle was announced on July 16; Chrysler, the most troubled, but still profitable manufacturer will begin manufacturing its brand-new mid-size car at a factory in Sterling Heights, Michigan, just north of Detroit.
Source: forbes.com
