Big Spending
Bloomberg recently reported that consumer credit in The United States is accelerating. In many ways that’s a good sign because consumer spending is a big part of the economy. However, credit card debt isn’t taking off. Big ticket items are fueling the advance, such as school loans and car loans.
School loans have something of a perverse dynamic right now, but auto sales are a clear bright spot. The 2007 to 2009 recession took a serious toll on car sales. General Motors Company (NYSE:GM), for example, was so weakened that it took a government handout and still had to make a trip through bankruptcy.
Auto Sales
According to fund manager Mario Gabelli, however, the U.S. auto fleet has the most vehicles off of warranty ever. So it isn’t surprising that customers are looking to replace their aging vehicles with new ones. Low interest rates are a supporting factor, since they make taking out a $30,000 loan allot cheaper. The fear of rising rates, however, could be pushing sales, too. That, in turn, could lead to a tipping point where rates advance to the point where buying a car is no longer desirable and sales fall.
Ford Motor Company (NYSE:F) is probably the best auto option today. The company’s image with consumers has been elevated by the fact that it didn’t take government handouts or go through bankruptcy. That’s a differentiation that can’t be taken away from the company. Like the other automakers, however, Ford Motor Company (NYSE:F) used the downturn to restructure its business and streamline operations.
It sold non-strategic brands and focused on cost savings. It is now a leaner and more competitive player. The shares have had a nice run, but are still well off their all-time highs. The stock offers an around 2.5% yield, boosted by a recent 100% dividend increase. Sales, meanwhile, have been higher year over year for the last two quarters and the company has turned a profit in each of the last ten quarters.
While the buying lasts, Ford Motor Company (NYSE:F) should be a solid performer. However, keep a close eye on rates. If they increase quickly or too much, sales could become increasingly difficult to make. With still stagnant wage growth, that point could be sooner than many hope. If sales fall off, consider jumping ship.
A Trip Through Bankruptcy
General Motors Company (NYSE:GM), however, shouldn’t be forgotten. The company also streamlined during the recession, taking advantage of bankruptcy to shed some of its burdensome legacy costs. It also trimmed its brand lineup back to a more manageable level. Both are huge benefits, though the General Motors Company (NYSE:GM) name was tarnished in the process.
Like Ford Motor Company (NYSE:F), GM shares have had a decent run of late on strengthening fundamentals. That said, Ford’s 14% year over year sales growth in May handily outstripped GM’s meager 3% increase. General Motors Company (NYSE:GM)’s sales mix improved, with fewer low-margin fleet sales, which is a positive. Growth at the company’s Cadillac brand has also been very strong, which is a good sign.
Although Ford Motor Company (NYSE:F) is probably a better option, General Motors Company (NYSE:GM) still has room to run if sales keep up. Like Ford, however, investors need to watch carefully for an inflection point where rising rates make car purchases less desirable.
On the Home Front
New homes are another area that is getting a boost from the specter of higher rates. That’s been good news for builders who cater to the lower end of the market, like Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI). However, this is also the segment of the market that is going to be hardest hit by affordability issues if rates rise.
D.R. Horton, Inc. (NYSE:DHI) saw its bottom line go from around $0.25 a share in 2011 to over $2 last year, while Lennar Corporation (NYSE:LEN)’s bottom line jumped from around $0.50 a share in 2011 to more than $3.00. Those are impressive earnings improvements and both companies have large backlogs to support the top and bottom lines. However, if sales dry up and buyers back out, their bottom lines could contract just as quickly as they ramped up.
Big Buys
Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) both sell big-ticket items. While there is pent up demand, low rates are a clear support to sales. The same is true in the housing market, where sales are growing rapidly, too. If rates do rise, look for Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI)’s less affluent customers to fall away quickly. Since higher rates could easily squash the momentum at all four of the companies above, these stocks need to be monitored closely right now.
The article Unleashing Pent Up Demand originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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