Despite reporting disappointing sales results for December, the U.S. auto industry registered its best performance since 2007 in 2013. Not surprisingly, automakers were among the best-performing stocks last year.
General Motors (NYSE:GM) shares gained more than 46% in 2013, outperforming the S&P 500. Toyota (NYSE:TM) also outperformed the S&P 500, gaining more than 32%. While Ford (NYSE:F) underperformed the broader market in 2013, the company's shares still gained nearly 20% for the year. More importantly for automakers, the outlook for U.S. auto sales in 2014 remains positive, thanks to three crucial factors.
Strong performance in 2013
U.S. auto sales rose 7.6% year over year in 2013, even though December sales results were disappointing. Industry sales were 50% higher than in 2009, when the recession sandbagged auto sales. Toyota, the world's largest automaker, saw its 2013 sales in the U.S. rise 7.4% year over year to 2.24 million vehicles, driven by a 12% rise in the Japanese automaker's luxury Lexus division.
General Motors sold nearly 2.8 million vehicles in the U.S. in 2013. The automaker's retail sales rose 11% in 2013, while its total sales climbed 7%. The company managed to post strong results for 2013 despite a weak December that saw retail sales fall 6%. Kurt McNeil, Vice President of U.S. sales operations at General Motors, said that 2013 was the year that GM and the auto industry put the last traces of the recession in the rearview mirror.
Ford's 2013 U.S. sales totaled around 2.5 million vehicles. The company saw double-digit annual retail gains across its lineup, with cars seeing a 12% increase, utilities seeing a 13% increase, and trucks seeing a 17% increase.
Why U.S. auto sales will continue to improve in 2014
U.S. auto sales are expected to remain robust in 2014. Analysts currently expect U.S. auto sales to rise to 16 million-16.5 million in 2014. This would mean another solid year for automakers.
In 2013, sales were largely driven by significant pent-up demand as consumers replaced aging vehicles, a trend that is expected to continue in 2014. In a report released last year, automotive information provider R.L. Polk noted that the average age of all light vehicles on the road stood at 11.4 years, an all-time high.
Along with the need to replace aging vehicles, auto sales will also be driven by an improving consumer confidence. Consumer confidence in the U.S. has been improving on the back of a recovery in labor market. Record stock valuations have also bolstered consumer confidence, which should boost spending in 2014. This augurs well for automakers.
Another major driver of auto sales this year will be low interest rates. A report from Experian Automotive released last month showed that interest rates for new vehicle loans fell to 4.27%, the lowest rate since the research firm began publicly reporting the data in 2008. The report said that as a result of lower interest rates, consumers in the U.S. are taking out bigger auto loans with longer payback periods.
According to Experian Automotive, the average loan on a new car climbed to $26,719 in the third quarter of 2013; this is the most in at least five years. There has also been a slight growth in subprime loans.
The Federal Reserve said last month that it will start easing its bond purchases starting in January. The Fed's decision to taper its bond purchases has pushed yields on long-term bonds higher. While this has also hiked mortgage rates, interest rates on auto loans are not likely to rise significantly. Auto loans are linked to the short-term fed funds rate, which the central bank is likely to keep at record low levels for a considerable period.
Toyota is the top pick in the sector
Given the three factors I discussed above, I'm still bullish on automakers. But the positive outlook for U.S. sales shouldn't be investors' only reason for optimism. According to IHS Automotive, global auto industry sales are expected to total 85 million vehicles in 2014.
My top pick in the sector right now is Toyota. The Japanese automaker is not only seeing improving sales, but also stands to benefit from a weaker yen, which will boost profitability.