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 (NYSE:F). The dependability survey contained good news for Ford buyers and investors alike, echoing the good news we heard last year. Overall, it improved its rankings in most areas, and each of the firm's three core American brands -- Ford, Lincoln, and Mercury -- scored better than the industry average of 227 "problems" per 100 vehicles produced. Outside that core, though, the news was mixed. Luxury brand Jaguar also scored "above average." However, Japanese partner Mazda and Swedish subsidiary Volvo lagged the average, and British prize Land Rover came in dead last -- 37th out of 37 makes surveyed, with nearly twice the industry average number of problems per vehicle.
General Motors (NYSE:GM) was a different story entirely. There, it was the upscale brands that saved the day, with Buick and Cadillac taking third and fourth place in the survey (Lexus took top honors, and Mercury came in second) and the now-defunct Oldsmobile making a respectable showing as well. But there's luxury, and then there's luxury. Hummer and Saab both scored below the 50th percentile this year, as did GM's more pedestrian GMC, Chevrolet, Pontiac, and Saturn brands.
Despite its best efforts, Teutonic-American amalgamation DaimlerChrysler (NYSE:DCX) performed worst of all in this year's survey. The company improved the stats for its key Chrysler and Mercedes divisions (in the latter case, remarkably so) yet wasn't able to keep pace with improvements in the industry overall. As a result, each of DaimlerChrysler's brands, which also include Dodge and Jeep, fell short of the industry average.
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 (NASDAQ:NSANY). After all, it's kind of hard to argue that the road to fixing GM can be traveled by way of Nissan -- when that company scored worse than both GMC and Chevrolet. About the only thing Ghosn had to brag about in this month's survey was the that his luxury division scored in the top 50% -- and even then, just barely.
In contrast to Nissan, both Honda (NYSE:HMC) and its Acura luxury division scored near the very top of the survey. No surprise there on either count.
And who beat out Acura and Honda (in order)? Toyota (NYSE:TM), of course. What's more, Toyota's own luxury division, Lexus, retained the top spot in the survey for the 12th year running.
Everyone else
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.
So what?
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.)
