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Tuesday, January 4, 2022, was an epic day for automakers as the industry begins a New Year inundated with good news.
Ford Motor (F) jumped 12 to percent to close at its highest price in 20 years. General Motors (GM) and Toyota Motor (TM) leaped 7 percent to new record levels. Honda Motor (HMC) and Ferrari (RACE) had smaller gains. Related names like Goodyear Tire & Rubber (GT), Stellantis (STLA) and Magna (MGA) also advanced
Two events triggered the rallies. First, monthly auto sales for December beat estimates. Business is still running at a slow pace because of lingering parts shortages from the coronavirus pandemic. For example, pre-covid annualized sales were about 17 million units, according to the Bureau of Economic Analysis. IHS Markit estimates last year totaled 15.1 million, and projects growth to 15.5 million in 2022.
While those volumes may be weak, other important factors like pricing and demand have improved sharply. Separate data from the Census Bureau shows new car prices jumping 11 percent in November. That’s not only the quickest increase since April 1975. It’s also the third-highest reading since December 1953. Higher prices help drive profit margins, which means companies can make more money despite selling fewer cars.
The strong monthly numbers came shortly after Tesla (TSLA) announced deliveries of 308,600 in the fourth quarter. That beat estimates for 267,000 units, launching TSLA by 14 percent on Monday. (Elon Musk’s company reports on a different schedule.)
Next, F stunned investors by announcing it would almost double production of its all-electric F-150 pickup truck to 150,000. It was the second time management has boosted capacity after an original plan for 40,000 units. The move suggests that executives (plus Wall Street analysts) have underestimated demand for the new pickups and are now scrambling to catch up. Some options traders, on the other hand, seemed to anticipate the breakout.
There could be more potential catalysts for Detroit automakers like F and GM versus TSLA, which based in Silicon Valley. First, GM and F each have more than 10 times the number of dealerships. Second, the older companies trade for less than 11 times forward earnings and less than 1 time revenue, according to Yahoo Finance. TSLA trades for 122 times forward earnings and 25 times revenue.
Third, the companies serve different demographics. A 2019 survey by CleanTechnica found that TSLA buyers have the highest average credit rating. Hedges & Co. separately reported that the company’s customers were skewed toward higher incomes (above $140,00 per household).
In contrast, most of the growth in the labor market has recently occurred at the lower third of the income scale. That could also provide a tailwind for GM and F, which serve the broader market.
TM also announced on Monday it will create its own in-house operating system for autonomous cars. While it’s unlikely to have an impact in the near-term, a shift toward software could also boost valuations because technology stocks trade at higher multiples than manufacturers.
In conclusion, automakers came to life in the final months of 2021 as pent-up demand drove profits. The trend shows few signs of letting up as a new year begins. If anything, this week’s news and breakouts to new highs may suggest the story is accelerating. Investors may want to follow the industry, especially if supply-chain issues continue to improve.
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