Monday, March 28, 2005

Watching the Auto Manufacturers

One thing you've got to know is that the market moves in cycles. The market goes up and it goes down. To make what some would call a "killing" you've got to buy as close to the bottom of the cycle as possible and sell as close to the top of the cycle.

The automobile manufacturers are moving towards the bottom of their cycle. It might not be possible to call the exact bottom, but we can get close. I've started looking into this sector with greater detail. I'll probably be posting as much as I can to help find this bottom.

Below you will find the charts of Daimler Chrysler (NYSE: DCX), Ford (NYSE: F), and General Motors (NYSE: GM). You will also find some fundamental information. Then we will look at the difference between the US auto manufacturers and those around the globe.

The sector is really not looking too good right now. Everyone is bearish on this sector. Here is what Efraim Levy, a Standard and Poor's analyst, has to say about the industry:

"Competition should remain intense, aided by new product introductions and incentives. We are concerned that high inventories may lead to additional production cuts in coming months, beyond recent announcements, or higher incentives. If gasoline prices stay above $2 per gallon for a sustained period, demand for fuel-inefficient-but-profitable light trucks may be hurt. Lower production and/or increased incentives in turn could reduce income.

The "Big Three" U.S. automakers collectively should see greater-than-industry average volume declines, as foreign car makers continue to gain market share. Of special concern to us is the highly profitable light truck, minivan and sport utility segment, which we think is facing increasing pricing pressure now that the Big Three's dominance is waning. We project that margins will come down in this segment. Increased sales of luxury import models are also hurting domestic manufacturers' margins in the luxury vehicle category. We think restructuring and other cost-reduction efforts should offset some of the margin pressure in 2005. However, we expect higher raw material, retiree and healthcare costs to squeeze margins.

We believe the favorable backdrop of relatively high employment, combined with aggressive vehicle incentives in the form of discounted prices and financing rates, should bode well for a continuation of relatively high demand for motor vehicles. However, rising competition will likely make profits harder to come by. With a combination of cost reductions and a move to more profitable non-car vehicle sales, automakers' profits have been strong during this upcycle. While a new higher sales plateau in North America may be sustainable, we have concerns about intensifying competition and acceleration of already-heavy incentive activity."

Not too bullish...

Here is some fundamental data on the "Big 3" for comparative purposes:

Daimler Chrysler:
Market Cap $44.82 B
P/E 14.04
EPS 3.15
Revenue $184.51 B
Net Income $3.2 B
Revenue Growth 11.90%
Gross Margin 19.35%

Ford:
Market Cap $20.54B
P/E 6.22
EPS $1.80
Revenue $171.65 B
Net Income 3.63B
Revenue Growth 171.65 B
Gross Margin 17.45%

General Motors:
Market Cap $16.02 B
P/E 5.73
EPS $4.94
Revenue $193.52 B
Net Income $2.81 B
Revenue Growth -0.70%
Gross Margin 12.44$

Looking at these charts you wouldn't get too excited either...


Click to Enlarge DCX Weekly Chart Posted by Hello

Above we have a weekly chart of Daimler Chrysler (NYSE: DCX). DCX is currently in a trading range and has been since the end of 2003. Long-term resistance seems to be in the $48/share region. DCX would have to convincingly break this level of resistance for anyone to get bullish on this stock. Daimler is the strongest "chartwise" and fundamentally of these three auto manufacturers.


Click to Enlarge F Weekly Posted by Hello

This is the weekly chart of Ford (NYSE: F). You can see that F has recently broken down through a declining flat triangle. This is not a good sign. If you own F, you should sell or pray for a re-test and then sell. The re-test might be coming if you are reading the Stochastics, which are indicating that F is extremely oversold. Are we going to make a move into the single digits again? One of my hedge fund co-workers actually called the bottom on this one back in late 2002.


Click to Enlarge GM Weekly Posted by Hello

Lastly we have a weekly look at General Motors (NYSE: GM). This stock is not in good shape. GM recently broke through my last buy point at around $29.85. This support line was very long-term. The line began in 1987 and has held ever since. This support line is now considered resistance and will be formidable resistance at that. I'm now looking at the low 20's or larger teens for a next buypoint watch.

I think the next big down move in GM will be when they restate their dividend lower. I can't be sure that this is going to happen, but it seems pretty likely. GM's dividend yield is currently at almost 7%. That's pretty high...I would assume a dividend cut in the future. The bottoming of the stock will most likely be around that point. We shall see.

Nobody likes the "Big 3" and that is why I am beginning to. Most money is made going against the crowd. I will be looking to pick up some shares of these stocks close to the bottoming of this cycle. We haven't gotten there yet and it could even take a few years, but I will be there waiting. I hope my readers will as well.

Best Regards,

The Soothsayer of Omaha

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