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Carmakers Set to Shift to Higher Gear

17 January 2014 in Trading Ideas

With continued hints that a slow-but-steady economic recovery may be taking hold, the world’s automakers appear to be revving up to take advantage.

And why not start with one of the industry’s newest players and certainly has been the most white-hot investment vehicle? Shares of Tesla surged again this past Tuesday, 15%, after the company said it delivered almost 6,900 of its Model S sedans during the fourth quarter, outperforming expectations by 20%.1

What’s more, Tesla said it expects to double its global service and sales locations in 2014. The news provided yet another lift in what has been an incredible year for the company – and its investors. In the past 12 months, Tesla shares have skyrocketed 390%.

And while the stock is only 3% of the That New Car Smell motif, it certainly did an outsized part in helping lift the motif to a 34.9% return over the past 12 months. During that same time frame, the S&P 500 has gained 27.5%.

That New Car SmellHowever, it’s not just new-school manufacturers delivering the industry’s upside. Earlier this week, General Motors said it would resume a dividend payment for the first time since 2008, after announcing that it sold 4% more vehicles in 2013.2

Meanwhile, Toyota said it expects the US auto industry will show that it hit 16 million vehicles sold in 2013 – that’s after rising 7.6% to 15.6 million vehicles in 2012, which marked the highest level since 2007. If that happens, it’ll mark only the second time since World War II that the US auto market has expanded for five straight years.3

That’s why the world’s carmakers are particularly focused on using this week’s auto show in Detroit to showcase their products – and ambitions. Volkswagen said it would invest $7 billion in North American production, with the ultimate goal of selling a million Volkswagen and Audi brand vehicles in the US by 2018.4

For its part, Ford has retooled its top-selling F-150 pickup, now 700 pounds lighter, in a bid to compete on the gas-mileage front.5

It’s worth noting that Toyota, which was expecting to sell 2.3 million vehicles in the US last year, does anticipate a “leveling off” in US market growth after what could be five straight years of upside.

On the other hand, as Toyota’s North American chief Jim Lentz noted in Detroit this week, steady economic growth and a falling unemployment rate means Americans “could start spending freely again.”

And that can help rev the engines for carmakers.

1Deepa Seetharaman and Ben Klayman, “Tesla demand surges, stock rises 16 percent,” Reuters, Jan. 14, 2014, http://www.chicagotribune.com/classified/automotive/sns-rt-us-autoshow-tesla-20140114,0,2550240.story.

2“General Motors to pay first dividend since 2008,” BBC.co.uk, Jan. 14, 2014, http://www.bbc.co.uk/news/business-25740289.

3Rose Kim and Craig Trudell, “US Car Industry Sales Growth Leveling Off, Toyota Says,” Bloomberg.com, Jan. 12, 2014, http://www.bloomberg.com/news/2014-01-13/u-s-auto-industry-growth-is-leveling-off-toyota-s-lentz-says.html.

4“Volkswagen makes $7 billion bet on US, but what it really needs is…”, dallasnews.com, Jan. 14, 2014, http://www.dallasnews.com/business/headlines/20140114-volkswagen-makes-7-billion-bet-on-u.s.-but-what-it-really-needs-is-….ece.

5Jerry Edgerton, “New aluminum-body Ford-150 is 700 pounds lighter,” CBSNews.com, Jan. 13, 2014, http://www.cbsnews.com/news/new-aluminum-body-ford-f-150-is-700-pounds-lighter/.