It has been a roller coaster on the market these last few
weeks, with concerns over the spread of Ebola and falling oil prices has had
investors dumping their stocks and running for the hills. It does not help that
China’s slowdown is starting to become very apparent and Europe’s strongest
economy, Germany, is sliding in recession. But this week investors have decided
that the sell-off has been overdone and stocks have bounced back accordingly,
most industries have been enjoying the rebound, including airlines that have benefited from lower oil prices and large tech companies like Apple and
Microsoft have also enjoyed nice rebounds. Other companies like Netflix and
Amazon have not fared as well but in this week’s blog I want to focus on one
industry in particular, the American auto industry.
Yes I’m
talking about General Motors (GM), Ford (F) and a newly traded Fiat Chrysler
(FCAU). Yes I know, investing in the U.S auto industry brings back some bad
memories. I am sure people still remember the days when the big three car
manufacturers flew to Washington and begged for a bailout. GM went bankrupt and
was rescued by Congress and Chrysler was sold off to Fiat, Ford managed to
stave off bankruptcy but to had its reputation scarred by the crisis. Since
those dark days though Auto stocks have bounced back, Ford is currently up 700%
from its recession lows and GM was up almost 40% last year. But 2014 is looking
bleak for U.S auto companies, the first 6 months were hell on earth for GM as
the company was forced to recall over 20 million vehicles, and as a result did
not show a penny in profit in the first half of the year. Ford has also not
performed to well this year with its stock down over 20% year to date. But what
about Chrysler and what is the future of the car industry?
To
begin Chrysler is actually Fiat Chrysler and currently trades under the ticker
symbol (FCAU), the newly minted car company’s IPO in the U.S is all part C.E.O Sergio
Marchionne plan to turn Fiat Chrysler into a global auto company, capable to
compete with the top companies in the industry, Toyota, General Motors,
Volkswagen, and Ford. Currently Fiat Chrysler is the 7th largest
auto company in the world, but it also trails behind its competitors in terms
of market share, but Marchionne has sworn to change that, he plans to turn Fiat
Chrysler into one of the largest automakers by 2018. His master plan though
requires cash, almost $62 billion worth of cash to be exact, that is how much
it will take to reinvent the company, hence forth the American IPO which was
intended to open the company to new sources of cash and funding.
For
investors this opens up a unique opportunity to buy into one of the fastest
growing companies in the industry. This might sounds overly optimistic but Chrysler’s
2nd quarter earnings certainly show a bright picture, Chrysler’s net
income grew 22% to $619 million, and September U.S auto sales increased 19%,
marking 54 months of continuous growth. Considering that the U.S is the number
one car market in the world that is a good sign. There are negatives to buying
into the Chrysler turnaround story, one of which is the amount of debt that
Fiat Chrysler will be carrying going into the future, and its debt is currently
at junk status. Also little information is actually available about Fiat
Chrysler since the company only recently made its market debut in the U.S.
Investor will have to wait until November 5th to get a more accurate
window into the finances of Chrysler. With that said both GM and Ford announced
earnings this week and there reports show mixed reviews of the auto market.
General
Motor’s Quarterly report on Wednesday actually showed life returning to the
largest U.S car maker. GM posted a profit of $1.47 billion on revenue of $39.26
billion, although this is higher from a year ago when GM earned revenue of
$38.98 billion profits are down year over year (GM made a profit of $1.72 billion
during the 3rd quarter of 2013).The good news for the auto industry
is that GM was helped by strong U.S car sales and increased operating margins
in North America (margins rose to 9.5% from 9.2% last year). Unfortunately North
America seems to be the only bright spot, a slowdown in Russia and South
America have hit auto sales in those regions. In the 3rd quarter GM’s
European division lost $387 million, while its South American unit has lost $32
million. Thankfully these losses abroad are offset by an increase in sales here
at home, GM’s rival, Ford, shows a bleaker picture of the auto industry.
Ford reported
earnings on Friday and they were less then exiting. The company said that its
profit dropped 34% this quarter, and C.E.O Mark Fields blamed a variety of one
time charges and a slowdown in the emerging markets. A slowdown in Russia and eastern
Europe were supposedly the reason why Ford’s European Division lost $439
million during the quarter, also Asia including China (the world’s 2nd
largest auto market) showed a slow down with Ford’s Asian assets losing some
$44 million. Apart from international sales Ford also showed a decrease in the
key North American market where earnings fell to $1.41 billion from $2.29
billion last year. Granted Ford’s 3rd quarter results were skewed
due to a number of factors, the largest of which was the shutting down of one of
its largest truck factories, which was producing Ford’s flagship product the
F-150 pickup. The plant was shut down in order to be remodeled to produce a new
aluminum version of the f-150, which is supposed to be more fuel efficient and guarantee
Ford’s dominance in the field of pickup trucks. Shutting down the plant cost
Ford $700 million which could explain why earnings were week.
Ford
and GM showed mixed earnings this week, and there stocks closed down during a
week where the market rebounded. Fiat Chrysler stock ended the week up but
still remain more or less flat since the IPO, personally I feel that the auto
market is very edgy, with the instability of international markets at the
moment and slim profit margins it is an industry that I would stay away from.
With that said, Fiat Chrysler in particular provides more growth potential then
any of its competitors including GM and Ford so this stock might have a place
in your portfolio.
IN THE NEXT FEW
MONTHS I WILL BE MAKING A WEBSITE FOR INVESTMENT WEEKLY WHICH WILL INCLUDE WEEKLY
STOCK TIPS AND POTENTIAL OPPORTUNITIES IN THE MARKET AS WELL AS WEEKLY ARTICLES
ABOUT MARKET EVENTS AND ANALYSIS OF VARIOUS INDUSTRIES
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THE NEW WEBSITE PLEASE COMMENT
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