Recovery hopes fuel auto stocks

ANDREW LECKEY

March 11, 1992|By Andrew Leckey

When economic recovery comes, more cars will be sold.

That steadfast belief has been enough to jump-start automobile stocks at a time when hard sales evidence to back up that optimism is lacking.

High hopes are preferable to current reality, which consists of massive layoffs of U.S. autoworkers, plant closings and accompanying anti-Japanese sentiment.

Auto companies' stocks are always a tricky proposition, since they're inextricably tied to the economy and consumer sentiment. You can find plenty of conflicting opinions among equity analysts on whether to praise or pan their prospects.

"It looks like vehicle sales are bottoming out, though gains often seem imperceptible," said Joseph Phillippi, auto analyst with Shearson Lehman Brothers. "Consumer confidence remains shaky, and no significant improvement in sales is likely until the second half of the year."

Chrysler rates Mr. Phillippi's strong "buy" recommendation, while General Motors and Ford receive his mid-level "buy." By the end of the year, he expects Chrysler stock to hit the mid-$20s, GM the mid-$40s and Ford the lower $40s.

"Day by day, everyone will be trying to time the economic recovery," said John Hilton, auto analyst with Argus Research Corp. "Unfortunately, even an economic recovery won't solve the problem that the three U.S. carmakers have competing with Japanese manufacturers."

Mr. Hilton recently upgraded GM from a "sell" to a "neutral" rating on the basis of its sales strength in Europe. He maintains his long-standing "sell" opinions on Ford because of its difficulties in Europe, and on Chrysler, because he doesn't feel comfortable with any company whose long-term viability is in question.

"U.S. carmakers will never sell more cars in Japan unless they decide to cater to the Japanese market, which they aren't doing now," said Richard Ozaroff, foreign auto analyst with the Value Line Investment Survey.

"The use of more U.S. parts by Japanese carmakers will definitely increase, though some suppliers may not like the traditionally strong control that the Japanese exert over the making of such parts."

Mr. Ozaroff isn't doing handsprings over the stock prospects of Japanese carmakers, expecting Toyota and Nissan to be average stock performers and Honda below average. Despite the excellent job the Japanese have done in securing customer satisfaction, the car market is weak.

If you go along with the positive side of the auto equation, here's the logic behind Mr. Phillippi's recommendations:

Chrysler at long last has solid all-new products to offer. The Grand Cherokee, which Mr. Phillippi has test-driven, makes its debut April 19 and should garner a chunk of the market, which has gone to Ford Explorer. It is being built in a new Detroit plant that uses fewer workers. Meanwhile, Chrysler's "LH" full-size passenger car, built in Canada, arrives Oct. 1. It should hold up well against Ford Taurus and Honda Accord, Mr. Phillippi said. Next year, there will be a new pickup truck and the "PL" subcompact.

GM has a hit in its Cadillac Seville STS, which is competitive with foreign luxury cars. The Chevrolet Suburban and Blazer are strong new trucks. The jury is still out, however, on the new Grand Am, Skylark and Achieva models.

Ford will "soldier on" with no really new models, awaiting the new Mustang in mid-1994, Tempo in 1995 and Continental in 1995. The new Taurus is doing all right but might have done better if more extensively redesigned, he said.

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