A spike in August vehicle sales is solidifying a rally in the auto sector. Here’s how smart investors are playing the domestic car resurgence…
Four years ago, Detroit’s Big-3 automakers were on life support.
Sales of auto and light trucks in the US were levels not seen since the mid-seventies. In June 2009, the annual rate of vehicles sold in America was at a mere 9.5 million.
The last time sales slumped that low was between December 1975 and January 1976 when 9.1 million and 9.7 million cars were sold, respectively.
But after an $80 billion bailout, massive layoffs, much-needed corporate restructurings, and 4 long years of hard work, we’re now seeing a dramatic turnaround in the domestic auto sector.
Last month, US vehicle sales climbed to a seasonally adjusted annual rate of 16.1 million units — the fastest pace since October 2007 — marking eight straight quarters of consecutive growth.
It’s been incredible.
Now flush with ample liquidity, GM has been relisted on the NYSE and has announced plans to repurchase all 500 million shares owned by the Department of Treasury by next spring.
In August, GM posted a 14.7% increase in sales — its strongest month since September 2008.
Meanwhile, Chrysler emerged from Chapter 11 bankruptcy under a new ownership structure with Italian automaker Fiat being the majority owner after the Treasury sold its stake.
They posted an impressive sales increase of 11.5% in August.
Ford managed to survive the period without government assistance but has certainly benefited from the government propping up its competitors. After selling off a number of its sub-brands and consolidating its debts, the company has made a profit every year since 2009.
As for August 2013, Ford achieved a solid gain of 12%.
In its journey to return to pre-recession levels, the auto industry is not only seeing its Big-3 flourish once again. Other companies are also basking in the glow of an increasingly healthy car buying market.
For example, I’ve recently been eyeing car dealers as potential investments.
You see, in addition to strong new vehicle sales, there were also 40.5 million used vehicles sold in 2012, a 4.4% increase from 2011 according to analysts firm CNW Research.
Even 2011’s sales of 38.8 million used cars was 5.2% higher than in 2010.
This market is growing in tandem with the auto industry’s rapid recovery. And dealers who are in the business of selling both new and used vehicles can enjoy the best of both worlds as sales continue to rise.
As such, I found two companies that show huge promise as the car buying frenzy grows…
Best Automotive Stocks to Buy:
AutoNation (NYSE:AN) and Avis Budget Group (NASDAQ:CAR) are two of the largest brands in their respective industries.
AutoNation is America’s largest automotive retailer with 267 dealerships across the nation. Avis Budget is the largest publicly traded rental vehicle operator in the US.
While AutoNation sells 33 new vehicle brands and Avis Budget’s primary business is in vehicle rental services, both companies also have a burgeoning used vehicle resale division. It’s within this resale business that I see the two companies having significant room for growth.
Last summer, AutoNation and Avis Budget collaborated to introduce the Ultimate Test Drive program, which provides car buyers access to a wide selection of used makes and models that both Avis and Budget offer in their rental fleets.
Customers can schedule their “ultimate test drive” online and have access to their vehicle of choice free-of-charge for two hours, or as long as three days for a nominal fee.
If the customer decides to buy the vehicle, the purchase is completed through AutoNation’s subsidiary, AutoNation Direct.
When the program launched last June, it was available in Arizona, California, Colorado, Florida and Nevada. New Jersey and Texas were included a few months later. Then just last month, the two companies added Georgia and Illinois to the list.
For AutoNation and Avis Budget, this market strategy could mean fast yet stable growth moving forward.
With consumers continuing to show confidence in America’s recovery, 2014 could be a big year for these two companies.