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Nearing The 16 Million-Car Mark

After the birth of their twins last fall, Dan Sondheim and his wife upgraded their VW Passat to a Volvo XC60 SUV. They now have a GPS navigating system and a rearview mirror light that warns of another car in the blind spot, among other bells and whistles. Most important, it's big enough to seat both babies in the back seat, plus store a double stroller in the trunk.

The Sondheims' Volvo was one of 61.87 million cars purchased worldwide last year — a 5% year-over-year increase. Even more people are expected to buy new cars this year, paving the road to recovery for global automakers' stock shares, which crashed 40% in the 2008 bear market.

IBD's nine-stock Auto Manufacturers group has made a stunning comeback after crashing 24% in 2011, underperforming the market by nearly 22 percentage points that year. It outpaced the market last year, climbing 27% vs. 16% for the S&P. In the past three months, the group advanced 14%.

The nine companies include three Japanese firms, Toyota Motor (TM), Nissan Motor (NSANY) and Honda Motor (HMC); three American, Ford Motor (F), General Motors (GM) and Tesla Motors (TSLA); two German, Daimler (DDAIF) and Volkswagen (VLKAY); and one from India, Tata Motors (TTM).

Volkswagen shares raced past the whole group in the past year, charging ahead 35%; followed by Toyota, +26%; and Tesla, +18%. The laggards, Ford and Daimler, fell 1% and 4%, respectively. Nissan and Honda took the lead in the short term, rising 24% and 23%, respectively, the past three months.

Toyota and VW each has 11% global market share, GM has 10% while Nissan and Hyundai-Kia each has 9%, according to Morgan Stanley. Ford controls 7% and Honda 5%.

Early Stages Of Uptrend Global auto sales are projected to grow 4.2% in 2013 year over year to 64.47 million units, according to Scotiabank. That's 13.5% higher than 2010. In January, sales for the eight largest makers climbed 15.1% year over year to 1.05 million units after diving 22.5% in December, according to TrueCar.com.

"We're in the early stages of a multiyear uptrend in the demand," said Efraim Levy, an analyst covering the five largest automakers for S&P Capital IQ.

Total U.S. auto sales surged 13.4% year over year in 2012 to their highest level since 2007, according to Briefing.com.

It was the third year in a row to see double-digit sales growth and the largest increase since 1984.

Scotiabank projects U.S. sales growth to slow to 4%, but still hitting 15 million units this year.

That's well above the 20-year low of 10.4 million units in 2009.

The annual average for the decade ended in 2009 was 15.79 million, with a peak of 17 million units in 2007.

In Europe, projections call for sales to hold steady at 11.76 million vehicles. That's far below their 14.39 million unit annual average from 2000 to 2009. Europe could see more declines before rebounding, says Levy.

Sales in Asia — the fastest growing region — hit 24.02 million units in 2012, more than double their average in the decade to 2009. Scotiabank expects Asian sales to rise 6%, to 25.46 units, in 2013.

Emerging SUV Markets Rapidly growing emerging market economies present the biggest growth opportunity for automakers. With rising living standards and incomes, emerging market consumers want more luxury cars, SUVs, vans and pickup trucks. Driven by sport utility vehicles' cachet among China's middle class, SUV sales grew 24% in 2012 vs. 5.9% for overall car sales. Emerging markets are projected to make up 70% of global sales growth over the next four years, according to a Baird auto report released in June 2012.

In the People's Republic, only 60 cars are owned per 1,000 people — deep below a global average of 135 per 1,000 and a far cry from the U.S. of nearly 800 per 1,000 — the world's highest — according to World Bank figures as 2010.

The 16 Million Mark The average U.S. car on the road is 11 years old — a record. People are sending fewer to junkyards and used-car lots because they can't afford a new one or can't get financing, says Jeff Rosen, an economist at Briefing.com.

People are buying fewer new cars because of stricter lending standards and personal debt worries in an insecure labor market, he says.

"Economic growth and pent-up demand are going to make car sales move higher," Rosen said. "Sales should easily reach 15.3 million (this year), and I wouldn't be surprised if they reach 16 million by the middle of the year or surpass 16 million.

In addition, companies that put off upgrading their fleets during the economic slowdown are starting to buy again, Rosen adds.

Efficient, Wired Cars In the developed countries, rising fuel prices are pressuring sales of SUVs and trucks, favoring smaller, more efficient cars.

"This change in consumer preferences has supported German, Japanese and Korean manufacturers, whose market share has consequently expanded," the Street Ratings wrote in a client note Feb. 3.

New car buyers also want Internet connectivity, electronic gadgets, longer life spans and improved safety features.

Nearly 90% of auto executives say new product development is their major growth tactic over the next five years, according to KPMG's Global Automotive Executive Survey 2013.

Environmental regulations enacted by the Obama administration last year require cars and trucks to get 54.5 miles per gallon by model year 2025. The move was supported by the United Auto Workers and 13 major global automakers.

They must boost fuel efficiency by improving ICE (internal combustion engine) technology, aerodynamics and air-conditioning systems while exploring alternative fuels such as ethanol, diesel and natural gas.

New U.S. fuel efficiency standards that take effect in 2017 will require automakers to reduce weight and drag by using lightweight materials such as high-strength steel, aluminum and carbon fiber.

With cities growing more crowded, automakers are churning out smaller cars. However, profit margins are much smaller on economy cars vs. luxury models and trucks.

"People have an idea that if you buy a small car it should have a smaller price, but the technology in each vehicle is the exact same," said Rosen of Briefing.com. "The only difference is the size of the vehicle and the steel component, which is small compared with the total cost of making a car.

Plus, research and development costs more for small cars, he says.

"That means that manufacturers see notably smaller profit margins on cars than they do on trucks," Rosen wrote in a report. "Thus, even as overall motor vehicle sales rise, the breakdown between cars and trucks will be instrumental in determining overall profit growth.

As a result, automakers have boosted bottom lines by cutting back on consumer perks and rebates. On average, carmakers offered $2,274 in incentives per vehicle in January, down 8.3% from the year-ago period and down 12.2% from the prior month, according to a Jan. 28 TrueCar.com report.

At a total of $2.39 billion, incentives are at their lowest levels since October 2005.

Investment Risks The major risks of hopping aboard auto stocks include overcapacity, trade uncertainty, increases in raw material costs, reduced consumer spending and increases in labor costs.

More than 50% of auto executives surveyed by KPMG said Japan, Germany, America, Korea, Spain and France have a high risk of overcapacity. Brazil hiked import taxes by up to 30% in 2012 to protect local producers. India has also jacked up tariffs. The three major U.S. automakers are negotiating new labor contracts with the UAW to become more competitive with foreign competitors.

"Huge health care and fringe benefits provided to big three (Ford, GM and Chrysler) employees give foreign competitors a strong advantage," the Street Ratings wrote.