Sure, last year was the second-best year ever for U.S. auto sales, with about 17.2 million cars and trucks being sold in the U.S.
But much of those sales came from excess inventories and were driven by costly incentive programs, neither of which was good for auto companies' earnings, says Wendy Beale Needham, managing director at Credit Suisse First Boston.
According to Needham, despite the strong sales numbers, auto production was actually down between 10% and 12% in 2001. But for 2002, she's looking for production to be down just slightly to perhaps up a little, which would be good news for the stocks of the Big Three automakers and their suppliers.
Here Needham, who's been covering the automotive industry for 20 years, discusses what she expects from the sector in the coming year, including from
, which is set to announce a major restructuring of the company this Friday.
TSC: Where do you see the best investment opportunities in the automotive sector in 2002?
Recent Meet the Streets
University of San Francisco's
Mellon Private Wealth Management's
INT Media Group's
Bollinger Capital Management's
Credit Suisse Asset Management's
We think the auto-part suppliers provide some terrific opportunities. Since I technically am not supposed to be talking about
because CS First Boston is advising the company on the sale of its
unit, I just want to focus on the suppliers. Suppliers are a good investment at this point from a stock-price perspective; you need to buy the suppliers when the fundamentals are poor, in anticipation of an upturn in demand.
We actually had terrific performance all through calendar '01. These stocks were a great buy in the beginning of '01, and then around the middle of the year, people got a bit concerned that we might be going into a double-dip recession. And then we had September events. But since the end of September, the stocks have rallied back again, in anticipation of a recovery in auto sales in '02.
TSC: Which automotive suppliers do you foresee doing particularly well, then?
We have buy ratings on:
Superior Industries International
Delphi Automotive Systems
Delphi, for instance, manufactures a great many parts, including electronics. They have about $800 to $1,000 worth of content delivered on each GM vehicle. American Axle, as its names implies, supplies axles, particularly to trucks. About 85% of their revenues come from GM, and with GM gaining share in the trucking market, American Axle is set to continue to do well.
TSC: Ford is expected to announce a major restructuring this coming Friday. What do you think this restructuring will look like?
We anticipate that they will address their excess capacity, and lay out what they think their demand and capacity should be. They then may announce capacity reductions, probably through shift reductions or slowing down line speeds.
We think they could announce
a reduction of as much as 400,000 to 600,000 units, which could mean two to three assembly plant
closings. That's very significant. In terms of the rest of the industry, sure, this will have an impact. There is too much capacity. There is between 5
million and 6 million units of excess capacity in North America, so to the extent that Ford would close some
plants down, that would help Ford
TSC: One of the points you made in one of your recent reports has been that you expect restructuring to be a theme for the automotive industry in 2002, as it was in 2001. Can we expect further layoffs in the industry, and what does that do for your general outlook for the sector?
Restructuring was certainly a theme in 2001, and I think you are going to see the benefit of those restructurings in '02. A lot of the companies have already said there will be fourth-quarter announcements of additional layoffs. I realize we're in the first quarter, but they haven't reported their fourth quarters yet, so, yes, there will be more. But that's sort of backward-looking at this point.
TSC: Turning to the future then, if you see them reaping the benefits of last year's restructuring, what can you tell investors to expect out of the automotive industry in the coming year?
Now that we have spent a lot of time talking about sales ... what's
important in this industry is production. Vehicle production is what drives the earnings for the automakers and the suppliers, so, over time, production and sales have to be the same. But, in fact, in 2001, there was a
inventory reduction in North America. So, while the sales figures for the industry were strong, production was down 10% to 12%. And that hammered the suppliers' earnings and hurt the Big Three as well.
For 2002, we are currently looking for production to be down 1% or 2%. We think the risk there, frankly, is to the upside: that it's more likely that production will be flat or up in 2002, rather than down.
And that will be the surprise. And if production is rising, it's likely you will see upward earnings revisions for the group, which can be a powerful driver for stock-price performance, as well.
TSC: So you are actually looking for a slight increase in production in 2002?
Not officially. Officially, I'm still looking for it to be down. But based on how sales have been going, we are anticipating we may have to raise our production schedule.
TSC: Looking back to what happened in the automotive industry, there were so many promotions, with 0% financing in some cases. Sales figures were strong, but how much did these promotions cost the automakers?
The incentive costs were high. No question about that. And they certainly did eat into the earnings of the auto companies. But you have to account for the price elasticity there, meaning that the Big Three definitely did sell more vehicles. Likewise, we anticipate sales to continue to be strong in 2002.
Americans will continue to buy cars, and there could even be some additional, unforeseen drivers to sales. Namely: a healthy replacement cycle, with approximately 4 million cars about to come off lease, as well as a growth in population.