Bearish On Auto Industry Stocks

Our prevailing overview for the US automotive industry going forward can be summed up with one word: negative.

OPPORTUNITIES

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market). There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road.

Automakers were denied $15 billion by the Senate, but we believe they will access the $15 billion needed from the TARP fund at the Treasury. A more permanent solution will be found when the Obama Administration is in place.

WEAKNESSES

Earnings are below expectations and have been for some time. Some of these companies may be bailout candidates, which would leave equity holders with no value.

Demand for autos is down 15% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry. Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage.

Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US. The presence of unions has led to costs being much higher than seen in other countries.

Pricing averages -2% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Raw material prices are elevated and can be up to 70% of the cost of a car. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

We have many Sell-rated auto industry stocks in the near term. Among them are Autoliv (ALV), AutoNation (AN), American Axle and Manufacturing (AXL), Ford (F), General Motors (GM), CarMax (KMX) Lear (LEA), TRW Automotive (TRW) and Visteon (VC).

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