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Used Car Buying Opportunity

Written by Robert G. Jackson    Friday, 13 February 2009

Is the auto boom slowing? Depends on whom you believe. A recent Wall Street Journal page one headline read, SLOWING DOWN: EVIDENCE IS GROWING THAT U.S. AUTO BOOM IS COMING TO AN END. Two weeks later Windsor Fund manager John Neff, one of the great stock pickers of his generation, told the New York Times that he's buying Ford Motor and Chrysler. Who's right? We'll put our money on Neff. So do The Street's best auto analysts. Ronald Glantz, senior vice president of Dean Witter, sees the market approaching 16 million car and truck sales this year, up from 15.4 million in 1994. Like Neff, he thinks Ford and Chrysler are the best buys. Glantz, who has an excellent earnings forecasting record, predicts first quarter earnings at Ford climbing to $1.50 a share from $1.13, and Chrysler moving to $2.70 from $2.30. For General Motors, he expects the largest jump: first quarter earnings of$2.50, up from $1.83. Rising interest rates? Glantz says factors like consumer confidence, used car prices and, most important, family formation and car replacement needs are more important factors than interest rates, and all of these are favorable. PaineWebber's Stephen Girsky and Prudential Securities' Philip Fricke agree, predicting that the auto cycle will remain strong for at least two more years. David Healy of S.G. Warburg & Co. figures that vehicle sales will climb to 15.7 million this year, with higher big three profits. His money is on Chrysler. Maryann Keller, of Furman Selz, thinks automaker profits will rise 15% to 20% this year, but she tempers her optimism a bit: "Incentives [price shaving] will go up. The Japanese are starting to creep up from under their problems. Incremental sales will be less profitable. We'll move from a seller's market to a buyer's market." How many people can afford the typical new car price of $20,000 plus today? Enough to keep Detroit busy. Remember this: Rising car prices have made used cars more valuable, giving buyers better trade in prices. Many of those squeezed out of the new car market by higher prices will be eager buyers for that large number of cars that are now beginning to come off two year leases. Another favorable factor is this: Carmakers are currently in a position to supply more of the most popular models, models that do not require price shaving to move. Two plants are now making Ford Explorers instead of one; three shifts are building Jeep Grand Cherokees instead of two; Chevy Suburbans will soon arrive from Mexico, as well as from a Wisconsin plant. This could push prices down, sales up. In the era of the 60 month lease, sticker price doesn't make or break a sale the way it once did. Neither do interest rates. John Neff is probably right: Auto sales will remain stronger longer than most people think. At the moment, however, the market seems to agree with the pessimists: The stock prices of Detroit's big three carmakers are down an average 27% from their highs a year ago. Responds analyst Girsky: "You know what they say: The market has called 15 of the last 3 recessions."

Last Updated ( Friday, 13 February 2009 )