Automotive Love Affair Over?

Many of us boomers grew up with muscle car fever in the 1950’s and 1960’s. Was there anything cooler than a ’64 GTO, a ’67 Shelby Cobra, a ’68 Road Runner, or any number of years of Chevelle SS? I think not! Many of us have also spent too much of our adult budgets on cars at times too.

So, it is difficult for me to understand the new age of youngsters, some of whom do not even bother to get their driver’s licenses within a few months of their 16th birthdays. Add to that the fact that we’re facing self-driving automobiles and stir in the possibility that the auto taking us could belong to someone else through services like Uber or Lyft. Talk about being out of control!

Is this why GM stock is selling at only 5.6 times its annual profit of $5.38 a share or less than 40% of its annual revenue? Ford’s stock is selling for twice that price to earnings ratio of GM, but it is still only 11.48. According to The Wall Street Journal (online.wsj.com/mdc/public/page/2_3021-peyield.html), the price/earnings ratio of the S&P 500 is just over 23.5. By the way, that is down a hair from the 24.9 of a year ago.

If we are tempted to think it is just a US phenomenon, Toyota sells at 9.9 its earnings, Honda at 8.4, and Fiat Chrysler at 5.8. The only pricey car makers are Tata Motors of India (21), Ferrari (36.5). Then there is Tesla, still losing over $750 Million a year, even as taxpayers like you and I are subsidizing its sales. It has no price to earnings ratio since there are no earnings!

The price of a stock is simply based upon supply and demand for those shares. That is hopefully easy to understand. But it also represents a rough approximation of the optimism (or lack thereof) of the total investing public in the future of the business. At this time, investors are wildly enthusiastic about Tesla’s future and pretty sour on that for GM or Fiat Chrysler.

This is the case even though GM is paying its shareholders a dividend of $1.52 per year, or 4.36 percent on its stock value. Its return on equity (the net investment value of each share) is positive 19. Tesla of course pays no dividend, and its return on its equity is negative 20. However its revenue is growing at a 5 year rate of 94 percent per year versus 1.59 percent per year sales growth for GM. Someday Tesla will probably sell enough cars to make a profit and that is what rabid investors are counting on quite seriously.

Even though US consumers bought a record 17.55 million autos in 2016 (Los Angeles Times, 1/4/2017), prices are softening. Car makers may have shot themselves in the foot again by leasing so many in the last several years, making recent model used cars all the cheaper as those leases expire. I will not be betting on a happy trend as I look at huge inventories on the lots.

What I do know is that 225 thousand GM employees are still counting on Mary Barra to be worth her $22M in 2016 ($28M in 2015 and highest in the world for auto manufacturers) and figure out how to increase sales and reduce expenses so that we do not pay more taxes for so-called Government Motors in addition to the billions we are footing for the US Postal Service. In my opinion, the best companies fill needs and wants so well they do not require public subsidies.

(Past performance is no guarantee of future results. Advice is intended to be general in nature. Stock values from Worden Brothers, Inc., TC2000, 2017.)

 

August 17th, 2017|Categories: Personal Finances|