Automotive Industry

Overview - Neutral

OPPORTUNITIES

The industry is very concentrated, with the top 8 global automakers 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. General Motors (GMGMQ) and Chrysler both have filed for (and are currently emerging from) bankruptcy, and will become more competitive in the long run.
 
WEAKNESSES

Earnings are below expectations and have been for some time. Demand for autos is down 35% 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, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, 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. Also, 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. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.
 
BUY/SELL RATINGS

AutoZone (AZO - Analyst Report) is a Buy due to improving same-store sales and a resurgence in the used car and auto parts market. TRW Automotive (TRW - Analyst Report) is a Buy due to restructuring.