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* The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market).
* There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.
* Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road.
NEGATIVES
* Earnings are below expectations and have been for some time. Some of these companies may be bailout candidates, which would leave equity holders with no value. * Demand for autos is down (15)% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry. Furthermore, high gas prices have resulted in a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive due to high gas prices, as they tend to have better gas mileage.
* Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US by US producers. The presence of unions has led to costs being much higher than seen in other countries.
* Pricing averages (2)% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Raw material prices are elevated and can be up to 70% of the cost of a car.
BUY/SELL RATINGS
* Autoliv (ALV) SELL; AutoNation (AN) SELL; American Axle and Manufacturing (AXL) SELL; Ford (F) SELL; General Motors (GM) SELL; CarMax (KMX) SELL; Lear (LEA) SELL; TRW Automotive (TRW) SELL; Visteon (VC) SELL
Paul Raman, CFA is a senior analyst covering the automotive industry for Zacks Equity Research.
Zacks Equity Research employs 50 stock analysts who are experts in the industries they cover. In these articles you will discover our analyst's insights on key industries in the news along with their favorite stocks to buy and sell now.
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