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How Soon Will the Auto Industry Revive? Comments

Kelly Summers   |   April 03, 2008
With sinking sales to job cuts by the thousands, it�s no great exaggeration to say that the American industry is in dire straits. The DJ US Automobile Index has declined by more than 21 percent in recent months (See the chart below).

Traditionally, most American households owned several cars. Now, the picture looks very bleak with Americans buying fewer cars in the midst of the ongoing recession and constantly rising gas prices. The auto manufacturers are forced to lower prices for new autos driving themselves into big losses. It all leads to jobs cuts and plant closures. In one word, the American automobile industry is going through hard times, and many investors have become very skeptical that the industry will ever revive, especially during a huge competition from European and Asian auto manufacturers.

However, some experts say that the bleak picture is not going to hang up there for long. People still need cars and will start to buy them again; and the manufacturers will receive their profits overseas, if not in the US. Moreover, with the prices being so low across the industry at the moment, now seems a great time to enter the industry with several nice picks for a long-term hold. Especially since there have been some movements showing that the industry�s revival is just a matter of time.

Several serious acquisitions of car companies were made last month. Probably the most sensational though expected was a $2- billion plus deal between India�s Tata Motors (NYSE: TTM, the chart below) and American Ford (NYSE: F). Tata, India�s largest bus and truck manufacturer, also famous for developing the cheapest ($2,500) car in the world, acquired British posh brands Jaguar and Land Rover, that cost Ford about $15 billion in losses over the last two years.

As the details of the deal have not yet been revealed, analysts eager to know how Tata is planning to integrate the marquee brands into its stable of sturdy trucks, buses, and functional passenger cars. Although TTM shares decreased 4 percent on the news of the acquisition, the company�s income increased by 26 percent in 2007, and its export grew by 10 percent over the last quarter.

The most indicative sign of a possible revival of the automobile industry is the investment of $300 million into the industry made by Warren Buffett and Eddie Lampert. The latter is often referred to as "the next Warren Buffett".

Buffett�s Berkshire Hathaway purchased $284.3-million, 9.6-percent share in CarMax (NYSE: KMX), a used vehicle retailer. The company owns and operates 86 superstores in 39 markets and is the fourth largest car dealer. The current price of the KMX stock is around $21, and its profitability was as low as 4 percent in 2007.

Eddie Lampert bought $28.7 million in shares of AutoNation (NYSE: AN), the U.S. largest car dealer. Now he owns 37.2 percent of the company, worth about $980 million. AutoNation owns and operates 322 new vehicle franchises from 244 dealerships located in major metropolitan markets, primarily in the Sunbelt region of the United States. The company�s stock decreased by 27 percent in 2007.

Both companies will probably stand the crisis due to their size. Large turnover allows them to receive income by selling cars cheaper than their smaller competitors. Large market cap is what can protect a company in hard times; at least that�s what Buffett says. And we have no reasons not to trust him.
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