The Home Depot, Inc. (HD): A Different Way to Play Housing

So far, housing has been very good to North American automakers. Chrysler saw sales of its Ram pickups swell by 49% year-over-year in April. Publicly-traded Ford Motor Company (NYSE:F) reported a 24% increase in F-series sales while General Motors Company (NYSE:GM) saw sales of its Silverado and GMC Sierra trucks increase at a 23% annual clip. Sales grew 8% as a whole in April, with pickups (the most profitable product) leading the pace.

Why truck sales can lead automakers

The Wall Street Journal reports that truck sales have a near-perfect relationship with housing construction. An upturn in new home starts, a multi-year trend that has only just begun, should continue to bolster truck sales well into the future.

Profits in the industry can and should sustain for many years. Ford recently added 2,000 new jobs to increase its production of F-series pickups. The company continues to build on capacity, hoping to build 200,000 more cars and light trucks in the United States going forward.

Recently revised earnings estimates for Ford eye a profit of $2.20-$2.25 per share by 2015, which, if given a reasonable 9-10 multiple for a cyclical company, would result in a share price significantly higher than the current $15 per share. Ford could rally to as much as $22 to $25 per share.

North American car and light-truck sales can also fuel General Motors’ bottom line. The company reports that, as a whole, it is operating in the United States at 100% of capacity on two shifts. Thus, GM has the capacity to add a new shift without incremental capital expenditures, boosting production by as much as 30% to 130% of two-shift capacity on a run-rate if sales continue to come in strong.

The Foolish bottom line

A nationwide shortage of trucks should continue to drive margins. Across the nation, car dealers are looking far and wide to fill orders. In Illinois, dealers report hunting down pickups from Ohio and even Iowa in order to keep up with demand.

Automotive companies are also fairly inexpensive relative to the broad market. Ford trades at 8 times forward earnings estimates while General Motors trades at 6 times forward earnings estimates. When Wall Street wakes up to the value in the cyclicals, automakers should lead. Truck sales will be the catalyst that attracts investment interest, and pushes earnings-multiple expansion.

The article A Different Way to Play Housing originally appeared on Fool.com and is written by Jordan Wathen.

Jordan 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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