Auto Stocks Could Rev Up in 2013

While much of the market has been worrying about the fiscal cliff, auto stocks have been quietly booming over the last month. A number of signs indicating an improving economy such as lower unemployment claims, increased housing sales, and a four-year high in auto sales have presented a boon for the economically sensitive sector.

F data by YCharts

As the chart above shows, this sector has cruised ahead of the broader market in the last month with all five of stocks above putting up gains of at least 10%. And despite those gains, these stocks still look considerably cheap.

Source: Yahoo! Finance; ttm = trailing 12 months.

All five stocks above look affordable based on the past year's earnings, with P/E's essentially under the S&P's long-term average P/E of 12, and are downright cheap based on 2013 projected earnings. So will auto stocks rev up in 2013? Here's what we can expect.

The 2013 outlook
There's no question that momentum favors the auto industry. Annual car sales grew more than 10% in 2012 for the third year in a row and are now approaching pre-recession levels when yearly sales numbered over 17 million. November 2012 was the best months for auto sales since January 2008.

According to market research firm Polk, new light-vehicle registrations are expected to improve 6.6% from 2012 to 15.3 million vehicles, though Polk doesn't see sales hitting the 17 million mark for several years. The research firm also cited a number of new vehicle models as a reason for a boost in sales, and the average car in the U.S. is now 11 years old, a record, so there is likely pent-up demand for new models. Outside of the U.S., the picture looks decidedly bleaker. In Europe, car sales have fallen sharply, as France, Spain, and Italy all experienced dramatic cutbacks in purchases in December. Italy saw auto sales fall 19.9% in 2012 and 22.5% last month, while France and Spain saw full-year declines of 14% and 13%, respectively, but December sales fell 23% in the Iberian nation. Those trends are expected to continue in 2013 as Europe struggles to emerge from a crippling recession, and attempts to figure out the right mix of austerity and stimulus to solve its myriad economic problems.

But despite the European bugaboo, auto sales are cyclical, and Europe is bound to recover eventually. Cars are not a discretionary purchase for most, and the lag in sales is likely to lead to greater demand in the future.

Ford also recently signaled its optimism about the future, announcing it would invest $6.2 billion to expand its domestic manufacturing base, and other automakers have placed bets on the auto industry returning to full health by 2015 as well. Volkswagen, Honda, Hyundai, and Kia have all expanded recently in the U.S or announced to plans to do so, and durable-goods makers in general seem to be expecting for stronger demand within the next three years.

Foolish takeaway
Based on the valuations of these auto stocks, the market seems to be expecting a worst-case scenario of zero growth and continued economic malaise. But, aside from the specter of the remaining fiscal cliff negotiations, there's every reason to believe the economy is headed in the right direction in 2013. Unemployment is as low as it's been since 2009, the housing sector is picking up, manufacturing is expanding, and consumer confidence was strong until the gloom and doom of budget cuts and tax hikes came on the horizon.

I've already placed a bullish CAPSCall on four of the five stocks at the top of the article, and I think the sector as a whole will continue to outperform as we've seen in recent weeks. If Polk and industry leaders are correct, these stocks should be winners for years to come as the recovery continues to spread.

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