It's August, and you know what that means: It's time to check in with J.D. Power and Associates for the latest stats on the world's leading carmakers.
Twice a year, the McGraw-Hill unit publishes reports on vehicle quality. In the summer, J.D. Power kicks the tires on new cars and rates their makers for "initial quality." A few months later, the research house looks under the hood of used cars and assigns grades for "dependability." The 2006 edition of that latter survey came out earlier this month, and the results are, if not entirely surprising, still worth perusing if you're pondering an investment in this sector. So let's take a look.
The Big Three
First up: Ford
Despite its best efforts, Teutonic-American amalgamation DaimlerChrysler
The other Big Three
Scrolling eastward, the survey gave General Motors CEO Rick Wagoner some extra ammunition to use in opposing Kirk Kerkorian's demand that GM link up with Carlos Ghosn's Renault and Nissan
In contrast to Nissan, both Honda
And who beat out Acura and Honda (in order)? Toyota
Foolish subscribers to Motley Fool Stock Advisor will be pleased to learn that David Gardner's May 2004 pick, BMW (OTC BB: BAMXF.PK), isn't just continuing to pull ahead of the S&P 500 (the stock's up 23% since being recommended, or 9% better than the index) but is improving in quality as well. BMW proper rose two places in the J.D. Power survey to take the ninth slot; meanwhile, its MINI division, while still producing incredibly bug-ridden cars, stomped enough of those bugs to rise six places since last year's survey.
Last but not least, the hero of J.D. Power's 2004 initial quality report, Hyundai, still hasn't seen its new-car creds translate into long-term reliability. Both Hyundai proper and its much-maligned Kia affiliate remain in the bottom 50% of the rankings, in durability terms. But give 'em some time, folks. They're working on it, and Hyundai has come a long way from the company that used to make the '85 Excel.
It's time to bring all this raw data together, neatly tie it all up with a bow, and see what it tells us about investing. Let's start with two quotes from J.D. Power -- the first from its 2006 survey, and the second a blast from the past:
2006: Brands that score well on this survey "have higher levels of owner recommendation and repurchase intent." And on average, buyers who act on that "repurchase intent" pay $250 more per new vehicle purchase, on average, than do customers who brand-hop.
2005: "Three-year-old vehicles of brands that perform above the industry average in [the survey] typically retain $1,000 more of their value than those of brands performing below the industry average."
So according to J.D. Power (admittedly not a disinterested party), doing well on its annual durability survey means two things for a company. First, it boosts margins. When these owners go back to the same brand for another new vehicle, the average extra $250 on each $20,000 sale translates into 125 extra basis points of gross margin -- not too shabby.
Second, because "durable" used cars hold their value better, the gap between the price of a new car and that of a used car contracts. And the smaller the difference in prices between buying used and buying new, the more likely a car buyer is to buy new. Every time a car buyer does that math and comes out in favor of buying new, it's an extra incremental sale for the manufacturer, which boosts revenues.
Better margins on higher revenues? Sounds to me like investors should pay attention to these surveys.
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Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy requires him to tell you that, but it doesn't say he has to tell you he drives a Chevy S-10. (Oops.)