Bloomberg News

Automotive Short Interest Belied by Detroit Rising Profits: Cars

October 10, 2011

Oct. 10 (Bloomberg) -- Automotive companies, sold short by more U.S. investors than any industry except services, are too cheap when weighed against record vehicle sales and provide opportunities for bets against a financial collapse.

Short interest, a measure of bets that stock prices will fall, in automakers and parts suppliers increased by 50 percent in September to 1.7 percent of total shares, according to researcher Data Explorers. The ratio of long to short interest deteriorated to the lowest this year at the end of last month.

Global auto sales are on pace to reach a record 74.6 million this year, J.D. Power & Associates says. Deliveries in the U.S. accelerated in September to the fastest pace since April, and sales in China may rise to 17.7 million, the most in any country ever. At the same time, the 28-member Bloomberg World Auto Manufacturers Index lost 21 percent through Oct. 7.

“These stocks have gotten hammered and are starting to represent good value,” Harry Rady, who oversees $260 million as chief executive officer of hedge fund Rady Asset Management LLC. “Obviously it hinges on which way the economy goes, but if anything even a little better than a very dire scenario materializes, these stocks could rock.”

Global monetary-policy makers, including the Federal Reserve and European Central Bank, are expanding efforts to support their economies as the euro region’s sovereign-debt crisis roils markets. Morgan Stanley, which rates the U.S. auto sector “attractive,” said in a report last week that “trading auto stocks in this macro environment is like playing ping-pong in a hurricane.”

‘Real Fears’

“You can’t have this much fear about sovereign risk, and mentioning U.S. economy and depression so frequently, without creating real fears for the real economy, and that hits auto sales, mix and pricing,” Adam Jonas, Morgan Stanley’s New York- based analyst, said in a phone interview. “It’s confusing investors because the bottom-up data does look pretty good.”

General Motors Co. may earn $7.83 billion in net income this year, a 27 percent gain from 2010, according to four analysts surveyed by Bloomberg. Ford Motor Co.’s profit may rise 16 percent from a year earlier to $7.56 billion, the average of six estimates. Shares of Detroit-based GM have plunged 40 percent this year, while Dearborn, Michigan-based Ford lost 36 percent.

“There are a lot of metrics in this sector that your value investor would look at and say ‘Wow, that’s pretty cheap,’” said Dennis Wassung, who helps oversee about $500 million at Cabot Money Management Inc. in Salem, Massachusetts.

GM Shorts

Short interest in GM climbed to 2.5 percent of total shares, about one-fifth of lendable supply, London-based Data Explorers said last week in a report. Ford’s short interest was 3 percent of total shares, the researcher said.

GM’s pension liabilities “no question” became investors’ biggest concern about the Detroit-based company during the past quarter, Morgan Stanley’s Jonas said.

The company’s U.S. pension fund, which faced a $12.4 billion shortfall at the end of 2010, may finish the year underfunded by $18.5 billion, he estimates. The liability will rise even as GM makes an estimated $6.1 billion in cash and $1.4 billion in stock contributions this year, Morgan Stanley estimates.

“That’s a huge offset to the very cash-rich balance sheet they have,” Jonas said. The pension liability “competes with what was until recently hopes of a cash-return story from GM. That’s being put to bed.”

Ford’s U.S. pension shortfall may climb to $11.6 billion this year, from $6.7 billion at the end of 2010, Jonas said. Morgan Stanley estimates the Dearborn, Michigan-based company may contribute $1.5 billion to its U.S. plans this year. Investors also are concerned about GM and other rivals closing a gap in product quality and “freshness” to Ford, Jonas said.

Ford’s Product

“The competition is going to catch up over the next two years,” he said. “It won’t be as much of an advantage. GM is replacing more product over the next two years.”

September U.S. auto sales gains exceeded analysts’ estimates, rising to a seasonally adjusted annualized rate of 13.1 million, according to Autodata Corp. The pace is the highest since April’s 13.2 million, when lost output caused by Japan’s tsunami started crimping supply of parts and cars.

The U.S. averaged annual sales of 16.8 million vehicles from 2000 to 2007, according to Woodcliff Lake, New Jersey-based Autodata.

Annual U.S. deliveries peaked at 17.4 million in 2000. China may pass that total for the first time, with sales increasing about 3 percent to 17.7 million in 2011, according to Westlake Village, California-based J.D. Power. China’s auto market may exceed 25 million annual light-vehicle sales by 2015, J.D. Power predicts.

China’s Growth

Regulators have moved to curb growth for China’s auto market this year by measures such as Beijing’s limits to the number of license plates available. Zhejiang Geely Holding Group Co. short interest peaked at 7.6 percent of total shares in August, almost all of the lendable supply, Data Explorers says.

“There’s a 10-year history there of substantial growth” in China’s auto market, said Cabot’s Wassung, whose fund holds shares of automaker Dongfeng Motor Co. “It’s not done. This year’s going to be a bit of a pause, but it’s likely that this trend of an emerging middle class that adds hundreds of millions of new consumers to the market is not over.”

Carlos Ghosn, chief executive officer of Renault SA and Nissan Motor Co., which has a Chinese venture with Dongfeng, said in an interview that investors are uncertain about the global economy and that moves in the share prices of his companies have been “extreme.”

“I am not particularly pessimistic, even though I don’t think we’re going to go through this very quickly,” Ghosn said in an Oct. 6 interview from Rio de Janeiro, where Nissan announced a new $1.4 billion auto plant in Brazil.

--With assistance from Alan Ohnsman in Los Angeles. Editors: Jamie Butters, Bill Koenig

To contact the reporters on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net;

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net


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