|
|
 |
 |
 |
 |
   |
INVESTING IN THE BIG THREE: DRIVE CAREFULLYWilliam Clay Ford Jr. is clearly looking forward to a bright, long future running the auto company that's his family's namesake when he takes over as Ford Motor Co.'s (F) chairman next Jan. 1. But shareholders in Ford, as well as General Motors (GM) and Chrysler (C), may not face the same rosy prospects he does. After a long runup in 1997 and early this year, stock prices of Detroit's big three carmakers have declined an average of 20% from their 52-week highs in recent months. Fear of an coming global economic slowdown is bringing down the group, along with the overall market. Sept. 17 was no exception. The Dow Jones industrial average fell 216 points to 7174. Ford slipped 1 1/2 points to 45 1/4, GM fell 1 3/8 to 57 7/16, and Chrysler suffered the steepest decline, slumping 2 1/2 to 49 7/8. Despite the price pullbacks, analysts aren't recommending a rush to buy. "We're late in the economic and the auto cycle," says Efraim Levy, an analyst with Standard & Poors equity research group. Autos sales have been at top levels of about 15 million vehicles for several years. "We're probably sustaining a peak," Levy says. Although he doesn't think a steep decline in auto sales is imminent, "the next leg will most likely be down." "The business is a mixture of positives and negatives," adds James Weiss, an executive vice-president at State Street Research, who manages the firm's large-cap growth portfolio -- and doesn't hold any auto stocks. WAIT TIL NEXT YEAR. One concern is that the consumer appetite for new cars may stall out, since so many people have already traded in their old cars in recent years. "The aged fleet is no longer," Weiss says. Add to that the downturn in the stock market, which may prompt some consumers who aren't feeling quite as wealthy as they did in July to put off buying a new car for another year, says Levy. Weiss is also concerned that the explosion of popularity of sport-utility vehicles, which has driven much of the recent growth, may have run its course. Another concern for Detroit's auto makers is the strength of the dollar over the yen, which is making foreign models more attractive, especially those from Japanese and Korean companies. The Big Three will either have to cut prices to remain competitive or lose market share. Levy says prices of U.S. models are already coming down. Adjusted for new features, a lot of 1999 models are in fact cheaper than the 1998 version, he says. For example, companies may have added a compact-disk player and raised the price a bit, but not as much as the value of the CD player. "On a real basis, prices have actually declined for a lot of cars," Levy says. "That is something that you really haven't seen before." On the plus side, Weiss points to a "revolution" in the past six to seven years that has resulted in improved quality, appealing new designs -- and more competitive pricing. "The products they are putting out now are much more likely to satisfy consumers," he says. "That's a huge positive." But he isn't buying auto stocks. In fact, he says he wouldn't buy any of the carmakers for his portfolio until after they either come out the other side of a recession -- which could take years -- or the dollar weakens against the yen and some competitive pressures ease so that productivity improvements could translate into higher earnings. GARAGE FULL OF CASH. For long-term investors willing to ride out the effects of a possible slowdown in the economic cycle, Ford may be the strongest pick of the three. It's now the world's most profitable carmaker, thanks mainly to cost-cutting programs initiated by Jacques A. Nasser, who'll become CEO next year. It also has a hoard of more than $14 billion in net cash reserves available to use for stock buybacks, a dividend increase, an acquisition, or an investment in dealers. The stock already yields 3.8%, the highest of the Big Three. A recent Merrill Lynch comparison of Ford and General Motors came down in favor of Ford. Of the two companies, Ford has the most consistent and highest quality of earnings and strongest balance sheet, according to the Sept. 10 report. "Given that the stock market is likely to continue to be volatile and that there is a potential for downside risk to the economy, we believe that investors should favor Ford over GM at this time for defensive reasons," Merrill analyst Nick Lobaccaro concluded. GM, however, may have more potential for profit gains. While Ford and Chrysler have already gone through restructuring to improve productivity and cut costs, GM still has lots more it can do to improve profits, says Weiss. But first it has to stabilize its business, which was hobbled by the strike in June and July. "GM is in the most trouble right now of the three companies," says Levy. Although it's still very profitable and there's room for it to improve margins, it's losing market share, he says. In an effort to win back customers it may have lost, on Sept. 14 GM announced it was adding rebates and extending sales incentives. Good news for car buyers, but bad news for profit margins. The company hopes to build U.S. market share back up to 30%, where it was before the strike. "I think it will take a little while, and they will definitely pay a price," says Levy, "but it is necessary for them to get up to that threshold." COMPLICATED PICTURE. Chrysler, like Ford, is well managed and has improved profits and quality. But its proposed merger with German automaker Daimler-Benz (DAI), announced in May and subject to shareholder vote on Sept. 18, complicates comparisons. For one thing, Daimler is a lot more than a German carmaker. It also has a lot of industrial and aerospace products. Analysts are just starting to turn their attention to analyzing the combined company. Merrill Lynch, for one, is neutral on both, although it recommends purchase of Chrysler over Daimler-Benz, since Chrysler is trading at a 10% discount to its value after the merger. One additional concern: It's unclear if DaimlerChrysler will make it into the S&P Index. An estimated 8% to 10% of Chrysler's stock is held in index funds, according to Morgan Stanley. Economic concerns may also override potential benefits in Chrysler's merger with Daimler-Benz. Gary Lapidus, an analyst at Sanford C. Bernstein, recently initiated coverage of DaimlerChrysler with only a market perform rating. "This should not detract from our favorable perspective on the merger synergies and DaimlerChrysler's competitive position," he writes. "Rather, it should place this very favorable story within a framework for auto investing that recognizes the highly cyclical nature of the business." All in all, an investing spin in any of the Big Three right now promises to be anything but a smooth ride.
By Amey Stone in New York RELATED ITEMS
|
Updated Sept. 17, 1998 by bwwebmaster
Copyright 1998, by The McGraw-Hill Companies Inc. All rights reserved.
Terms of Use