Auto Manufacturer’s Industry Analysis

What?

Today I’m going to be looking at the Auto Manufacturer’s industry. This is a massive & very cyclical industry which in 2018 produced 95,364,593 units worldwide¹. As I said the Auto Manufacturing industry is an extremely cyclical one with the GDP of a country having a huge impact on the numbers of units sold in any given year in that country. Everybody drives a car or motorbike or takes the bus & trucks will always be needed to sweep the roads, clean sewers & do other tasks so everybody is affected in their daily life by auto manufacturing although it may not be something you understand so you’ll have to see how it fits your investment style & portfolio.

Looking at the industry in more detail seen as it is quite diverse I have further broken the industry down into 4 subcategories: Cars & Trucks – Recreational Use, Bus & Truck’s – Military & Government Use, EV’s – Recreational Use & then Scooter & Motorbikes.

Why?

Over the past 19 years the industry has grown on averaged by 2.8% compounded², not bad but certainly not a high growth industry but that can be okay to invest in too. However, since the last recession in 2009 the industry has grown by nearly 5% compounded³ & that is how big gains are made by investing in Autos. By buying when there is blood on the streets & Wall Street thinks nobody is ever going to buy a new car again you can make a lot of money in such cyclicals.

Looking at the revenue growth achieved by the industry over the past 10 years we can see that it has increased by a Compound Annual Growth Rate (CAGR) of just over 5% however growth has been slower over the past 5 years with a CAGR of just over 3.5%.

Also, from a personal standpoint I like cars, trucks, buses & motorbikes. I’m interested in how they work & I use them weekly as I would imagine many others do too. The industry is an interesting one to me I like following the updates & I always like looking at new vehicles & learning about them. Having said that though I’m certainly no expert in understanding them.

When?

The key to investing in such cyclical stocks is to buy in a downturn. Not when the economy is going well. Often people look at auto stocks & see price earnings multiples of 6-10 & think it’s a great bargain. All too often though the market is just pricing in the risk of the next recession which will kill the earnings of auto companies and other such cyclical business & if you haven’t done your due diligence it can often kill the company as was the case with GM & Chrysler in 2009 before they were resurrected by the American government & taxpayer.

The real ratios to be looking at when investing in Auto’s is the CAPE (Cyclically Adjusted Price Earnings) Ratio & the CAPFCF (Cyclically Adjusted Price to Free Cash Flow) Ratio & as I mentioned earlier another way to get an indication of how auto companies are going to do in the shorter term is by looking at the GDP predictions for a certain country or the world depending on where the company is looking to sell its vehicles.

Porter’s 5 Forces:

1. Competition in the industry

2. Potential of new entrants into the industry

3. Power of suppliers

4. Power of customers

5. Threat of substitute products

Competition in the Industry: As we’ll see in a minute there any many auto manufacturers with some small & some large players however the industry is quite fragmented right now in my opinion & that’s just looking at the US listed companies. Below is all 20 companies market share in the auto manufacturing industry in 2018. As of 2018 only 5 of those 20 listed on US exchanges had more than 5% of the total market share – reinforcing that fragmentation across the industry.

Data Source: Quickfs.net

Potential of new entrants into the industry: Auto manufacturing is something that anybody can get into in their own garage so the barriers to entry are very low to new competitors. Of those 20 stocks that I’ve analysed 7 of them have IPO’d in the past 10 years so it’s clearly not a difficult business to get into.

Power of suppliers: This is a big one currently for auto manufacturers in the US. With the current US-China Trade War & tariffs on imported Steel. Also, there has been a 10% tariff placed on Imported Auto Parts from China by the US as of September 2018. With most of the worlds auto manufacturers relying on a few Chinese manufacturers those Chinese manufacturers have become dominant at certain points in the supply chain giving them significant supplier power⁷.

Power of customers: Customers have a fair amount of power in this industry given that today’s auto industry is filled with a wide range of brands, large amount of capacity, and zero switching costs between brands. Another way that buyers have affected automobile production and sales is through consumer confidence⁸.

Threat of substitute products: This is a bigger problem for auto manufacturers now more than ever before. Automakers should be concerned with is the growing rate of public transportation usage. Public transportation serves as a viable substitute to the products of car manufacturers. Annual ridership of all forms of public transit has risen by almost two billion- a 25% increase over 10 years⁸. The largest increases come from busses and subway/elevated trains. The increased cost of fuel is causing morning commuters to change their habits and arrange for public means of transportation & ride sharing like Uber & Lyft. There has also been a recent, unprecedented push for high-speed trains to be developed to transport people from city to city by a means both expedient and economical. Such rail systems would be modelled after the many that span Europe & Asia. It is argued that these high-speed train systems will save time, money, and city congestion. One thing is for certain; fewer miles driven results in a lower scrap rate, and therefore fewer vehicles purchased. Popularization of public transportation as well as a strong push for these high-speed metropolitan trains could have a significant impact on new car sales for auto manufacturers. However, I believe it is ride sharing & the fact the millennials don’t care about owning a car as much as previous generations could lead to lower sales in the auto industry.

How?

Currently there are 20 Auto Stocks Listed on American Exchanges (NYSE⁴ & Nasdaq⁵). There are also many major players in the auto industry that are listed outside of the US but personally I’m just looking at the US listed companies for now. Of the top 15 car manufacturers only 5⁶ of them are currently listed on the US exchanges but I still believe that there is plenty of opportunities to invest in & we will see is there any value there when I dig further into each individual stock so stay tuned & subscribe for that. Also, you could invest in an Auto manufacturing ETF such as the First Trust Nasdaq Global Auto Index Fund ETF (CARZ) or the Global Auto Industry ETF (VROM). However, such ETF’s are not for me as they buy more of the biggest stocks which is not always where the best value is, so I prefer to dig into each company & see which one offers the best risk & reward for me & my portfolio.

Another possibility is if you’re looking to get exposure to increased future auto sales is by investing in either the raw materials such as base metals, rubber companies or parts companies but I’ll be talking more about them another time & for now this report is just about auto manufacturers solely.

Firstly, looking at the Car & Recreational Truck subcategory we have 9 companies. In alphabetical order these are Ford (F), Fiat Chrysler (FCAU), General Motors (GM), Honda Motor Corp (HMC), NIO (NIO), Ferrari (RACE), Toyota (TM), Tesla (TSLA) & Tate Motors (TTM). Over the past 10 years only 3 of the 9 companies have managed to increase their market share (Highlighted in Green) & 1 has kept its market share (Highlighted in Yellow).

Data Source: Quickfs.net

Although it is these 4 companies that appeal the most to me on the surface as they have either maintained or increased their market share over the past 10 years, taking a deeper look at some of the aforementioned cyclically adjusted ratios & as well debt because debt has a huge impact on whether a company can survive any downturn we can see that 5 of the 9 companies are saddled with debt due to having more long term debt than equity as shown in the table below.