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New Car Revival Hits the Accelerator

11 February 2015 in Trading Ideas

Low gas prices and low interest rates have helped the automobile market for new vehicles increase its speed.

As the Los Angeles Times reported last week, General Motors, Ford, Chrysler, Toyota, Honda and Nissan all reported double-digit gains sales in January. Smaller companies, including Subaru and Hyundai, had their best January ever for US sales.1

The Times said the industry sold more than 1 million vehicles in the US last month, a 13.7% gain from the same month a year earlier, according to industry research firm Autodata Corp.

Truck sales were especially strong, and that helped automakers with a broad range of vehicles, Tom Libby, an analyst at industry research firm IHS Automotive, told the Times.

Even better for automakers and, possibly, investors in stocks related to new car sales, that’s a trend likely to continue this year, according to Libby.

“Those manufacturers with full-size pickups and SUVs, including GM, Ford, Fiat Chrysler Automobiles and Toyota, will enjoy sales gains over and above their rivals in today’s environment of exceptionally low fuel prices,” Libby said.

The big American automakers and Toyota – all big truck sellers – gained market share last month at the expense of the European car companies and the small Asian brands, according to Autodata.

Automakers are on pace to sell at least 17 million vehicles this year and maybe more, said Erich Merkle, a sales analyst at Ford.

Kurt McNeil, US vice president of sales operations at GM, told the Times, “Consumers feel very good because more people are working, the US economy is expanding and fuel prices are low.”

The strong January numbers were a boon for new car related stocks and related investments.

The That New Car Smell motif, for example, has gained 2.7% in the past month. In that same period, the S&P 500 has increased 1.4%.

Over the past 12 months, the motif has risen 9.5%; the S&P 500 is up 16.1%.

In addition to higher sales, carmakers also were able to generate higher per-vehicle revenue. The average transaction price for light vehicles was $32,812, up 3.5%, according to TrueCar, a car price and shopping information company, the Times said.

“January turned out to be a very healthy month for several automakers, with GM, Honda and Subaru all posting net revenue gains of over 20%,” said Eric Lyman, vice president of industry insights for TrueCar. “With consumer spending rising at the highest rate since 2006, consumer sentiment at a decade high and low gasoline prices, we’re bullish on automakers’ total revenue for the year.”

Conditions are unusually favorable for people to buy more expensive vehicles, according to Jessica Caldwell, an analyst at car information company Edmunds.Com.

The average car loan terms are at a record high of 67.2 months, Caldwell told the Times, while average interest rates remain “at the relatively low rate” of 4.5%.

“This means that car shoppers who assume longer loans are able to get more car for about the same monthly payment as they had made in the past,” Caldwell said.

That also means that investors in new-car stocks may feel more optimistic the longer interest rates remain low.

1Jerry Hirsch, “US auto sales surge 13% in January,” latimes.com, Feb. 3, 2015, http://www.latimes.com/business/la-fi-auto-sales-20150204-story.html, (accessed Feb. 9, 2015).