Why These Old Economy Stocks Are Absolutely Crucial

 

Ages ago, a great uncle gave me a well-used 1977 Chrysler “New Yorker Brougham” coupe.

The ride was larger than life and smooth. It floated down the road.

More recently, Fiat S.p.A. (OTC/FIATY) is thinking of taking Chrysler Group LLC public as a little enthusiasm returns to automakers.

According to Chrysler, March sales were the strongest for the company since December 2007.

First-quarter 2013 earnings fell significantly due to production changes. Automakers book their revenues and earnings when vehicles are shipped to dealerships.

At one point, Chrysler owned Lamborghini. The luxury sports car brand was most recently acquired by Audi AG, which is owned by Volkswagen AG (OTC/VLKAY).

Sales figures from domestic automakers are generally good. On the stock market, Ford Motor Company (NYSE/F) experienced a resurgence last fall, but the position really hasn’t been doing much for quite some time. The stock is not expensively priced at all.

Ford is now showing resilience in its earnings. First-quarter 2013 pretax operating earnings in North America grew 14% to $2.44 billion, which was a record for any quarter.

Ford North America reported strong growth in the first quarter, with wholesale volume jumping 17% over the comparable quarter, and revenues growing 20%. (See “Keeping It Rolling—U.S. Energy Boom Good News for Railroad Stocks.”)

The company’s full-year guidance for Europe remained unchanged, with the company expecting an earnings hit of about $2.0 billion in that division.

The Center for Automotive Research (CAR) produces a lot of useful information on automakers. The think tank expects auto sales growth to slow to single-digit percentage annual increases, compared to the last three years.

CAR views recent strong sales as being due to pent-up demand for new vehicles, rather than sustained strength in the U.S. economy. CAR expects automotive vehicle production to fully recover to pre-recession levels in the next two years, but it does not expect a recovery in pre-recession automotive employment.

It is difficult to make the case for investing in U.S. domestic automakers. While valuations are fair, earnings growth for this year is expected to be flat.

Many Wall Street firms basically rate General Motors Company (NYSE/GM) and Ford as “holds.” I wouldn’t touch them.

Domestic automakers are still very important to the U.S. economy, as they still hold approximately 45% of total market share.

The lack of employment growth among the big three automakers is certainly an issue and earnings growth is inconsistent.

Ford was able to gain advantage over General Motors during its bankruptcy, and the “F-150” remains the number-one selling truck. Even if Chrysler does come back to the stock market with positive earnings, I wouldn’t consider it.

Healthy domestic automakers are required for genuine economic and employment growth. The numbers just aren’t strong enough yet.