At this point, Ford has rallied more than 50% off the bottom of last May and should continue to outperform the S&P 500 for as long as the index keeps rising. Global car sales, however, are beginning to hit a wall, especially in Europe, and we’ll see this slowdown in sales very likely spread to the U.S. before the end of 2013 as the economy struggles with high unemployment, low credit growth and higher taxes on the lower and middle classes. The sharp rise in interest rates that we have seen in response to Japan backing off on Yen debasement is already having an effect on car sales as manufacturers have pushed prices down by 8% of MSRP to keep sales flowing.
U.S. automakers and Toyota Motor Corporation (ADR) (NYSE:TM) have enjoyed a reprieve granted by cheap money and government stimulus but even that has its limits. Their stocks may rise but I would not count Europe and the U.S. as growth drivers. That mantle still falls on India, China, and Southeast Asia. India’s car sales are in a sustained downtrend, Southeast Asia’s inflation pressures have been rising with a rising dollar and the yuan’s isolated strength has pushed China’s competitiveness down far enough to have a meaningful impact on its growth. So, in a world of rising bond yields, it is hard for me to be fundamentally bullish on new car sales in over-leveraged economies.
Of the four major car companies discussed, I like Volkswagen AG (FRA:VOW) best as most of its direct competition in its core market — Europe — are suffering the most and will continue to leverage its massive cash position to drive operational efficiency and technology improvements. Moreover, the ECB has not yet joined the printing party to the same extent as the U.S. and Japan and when that occurs it will keep a lid of the euro and VW’s prices overseas, allowing it to continue driving growth.
Toyota is helped in the U.S. by a mixture of the now lower Yen and the ability of GM to overcome a slow down in sales due to pension obligations. GM’s current profitability can vanish in a heartbeat with a further slow down in fleet sales, likely in an era of government budget cuts. Toyota’s stronger brand and now more competitive prices should help it maintain volume in the U.S. with higher rates.
Ford Motor Company (NYSE:F) has a cleaner balance sheet and is starting from a smaller base than General Motors Company (NYSE:GM) and is not as dependent on fleet sales. Also, I like its plans in Southeast Asia — the new Ranger is a hit in a place where the pickup truck is more important than in the U.S. I also like its positioning in Thailand as the regional distribution hub for its vehicles.
The article Toyota and Ford Battle in the U.S and China originally appeared on Fool.com and is written by Peter Pham.
Peter Pham has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors Company (NYSE:GM). The Motley Fool owns shares of Ford Motor Company (NYSE:F). Peter 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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