January and February were two great months for vehicle sales in the U.S. market, delivering great sales figures, profits, and renewed optimism at Detroit automakers Ford (NYSE:F) and General Motors (NYSE:GM). In those same two months, however, the stock prices of Ford and GM haven't responded – both companies lag the broader market. With a rebounding U.S. market, and gaining share in China, it's clear Europe is the biggest cause of pressure on domestic auto stocks. I bet you're shocked, huh? There's no need to panic or avoid these stocks, for the European market will bottom out and rebound eventually. What's important is understanding if the rebound will resemble the U.S. market or the Japanese market. If you don't know the difference, then read on; it will make a huge difference in the stock prices through 2020.
Japan or U.S.
Ford expects to lose more money in Europe in 2013 than it did in 2012. Not good news from a company that lost $1.8 billion there last year. Analysts expect sales to start recovering in 2014, but they see a slow and gradual rebound. Vehicle sales aren't expected to reach pre-crisis levels until the end of the decade, at least. That's terrible news considering that the European auto market once was the largest in the world.
Some analysts now believe Europe could resemble Japan's auto recovery rather than that of the United States. "Auto sales in the U.S. recovered to 14.4 million in 2012, up 13.4 percent from 2011 and 39 percent from 2009. This was in contrast to previous market assumptions and forecasts pointing to long-lasting depressed conditions," Emmanuel Bulle, Paris-based autos analyst with Fitch Ratings said.
He goes on to mention that Japan's vehicle sales have fluctuated between 25% and 45% below its 1990 peak, never fully recovering. If that's the case, and the European consumer doesn't fully return, it makes maintaining market share in the U.S. and growth in China the most important factors going forward. There is hope though; let's look at a few factors that will help Ford and GM get out of this rut.
Been there, done that
Obviously, industry sales are expected to decline again this year, but consider some other factors. There are advertisements that are offering discounts equivalent to over $9,000 per vehicle. Some nations are also considering scrap programs, similar to our cash-for-clunkers program, which would make it even more difficult for automakers to estimate needed inventories. Any of that sound familiar? It's 2008 all over again, with a European twist.
Alan Mulally, Ford's CEO, still expects to lose $3 billion over the next two years in Europe. That said, the company has seen much worse and come out better than ever. Consider that between 2006 and 2008 Ford lost $30 billion due to the U.S. recession -- or 10 times more than it expects to lose in Europe over the next two years. Ford plans to use the same cost-cutting tactics that helped return Ford to profitability in 2009. This time it will use the tactics in Europe. The plan is to cut costs by $500 million a year and reduce in-stock vehicle inventory by 20%. It will also be cutting factory capacity, which has been difficult due to political pressure. This adversity isn't anything new, and much easier to handle than the 2008 U.S. crisis. Mulally and Ford have been there, done that, and I expect them to get the job done again.
GM has also learned a few things from recession and bankruptcy. Meet Susan Docherty, head of Chevy and Cadillac in Europe. She's a trooper, having witnessed GM's bankruptcy, the plunge in U.S. industry sales, and the cash-for-clunkers program mentioned earlier. She'll be instrumental in taking lessons learned years ago and applying them to very similar situations in Europe.
In some countries Chevy will be offering covered maintenance (oil changes, tire rotations, etc.) for up to three years on vehicles purchased. A less confident consumer worried about decreasing income will have one less thing to worry about.
As mentioned earlier, advertisements are sporting over $9,000 worth of incentives to sell vehicles. GM decided it isn't going down that road again; it didn't work in the U.S. and doesn't make sense now. It will concede market share and avoid incurring massive losses to move vehicles off the lot. This is a great sign for investors, and hopefully that lesson will hold true for GM's operation in other countries.
Ford and GM are making the right moves to minimize losses in Europe. As cost-cutting measures begin to take effect and a gradual recovery occurs, both companies will be sitting pretty. It will take time and investor patience because for the foreseeable future Europe will put pressure on the stocks. A patient investor can pick up a valuable company poised for future success. I personally believe Ford has reacted quicker and proved itself to handle the original crisis much better than its rival GM. Keep an eye on whether Europe's recovery resembles the U.S. rather than Japan, or somewhere in between. By the time 2020 rolls around, Ford might be the star in your portfolio. At least, that's what I'm banking on.