Despite some uncertainty, auto stocks still hold allure

September 01, 1993|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Safety is drawing Americans back into automobile showrooms.

Dual air bags, anti-lock brakes and built-in child seats, despite their added cost, are proving to be greater lures for consumers than styling or horsepower.

At the same time, U.S. carmakers are benefiting from a strong yen, which is significantly driving up the prices of rival Japanese cars.

By 1997, Japanese car sales in this country could decline to 20.9 percent of the market, while Ford Motor Co.'s share could rise to 26.4 percent, Chrysler Corp.'s to 15.1 percent and General Motors Corp.'s to 34.9 percent, according to a forecast by Prudential Securities.

Because many aging American cars are overdue for trade-in, it might appear that this beleaguered industry is at last steering its way toward Easy Street.

But not so fast. Investors who have seen their shares of the Big Three automakers rise an average of nearly 40 percent this year have reason to wonder whether everything will turn out as rosy as those hefty stock prices indicate.

As 1994 models begin their journey to local automobile showrooms, the domestic economy remains a question mark. While it seems to be improving, it's doing so at a snail's pace, as concerned taxpayers ponder effects of President Clinton's new tax package before they shell out hard-earned cash.

"The U.S. auto industry is in a cyclical recovery, but it's a muted one, and it will be heading into a tougher selling environment the next couple of quarters," warned Jack Kirnon, senior auto analyst with Salomon Brothers.

Kirnon also believes the trend toward leasing means less profit for carmakers.

"Not only the new economy package, but the scare over health care changes will take their toll," he predicted.

What you decide to do about auto-company stocks depends largely on your confidence about the economy.

Michael Bowyer, analyst with Duff & Phelps, predicts the industry will take longer to reach peak levels than it did in past recoveries. However, while many investors may wish to sell shares to take advantage of this year's price run-up, he'd wait a while.

"I don't see real dividend growth among the Big Three, and I don't sell until after I see dividend growth and the shares reach their full value," Bowyer explained.

"We're looking at holding these shares for a year to get peak prices, with Chrysler closer to its peak than the other two."

John Hilton, analyst with Argus Research, believes the current level of industry sales may be unsustainable, and he sees a softening "as some consumer enthusiasm trails off."

He rates all the Big Three stocks as "holds," and he believes the Japanese will give up market share far more grudgingly than some experts expect.

With all these caveats, however, the auto industry, whatever the actual pace may be, is really headed for better times.

"I expect the U.S. auto industry will experience a 6 to 7 percent annual expansion through 1996," said Wendy Beale Needham, managing director with Smith Barney, Harris Upham. "Projected sales of 14 million vehicles for the 1993 model year should grow to 14.7 million for 1994."

There are investment prospects among the Big Three, linked to high hopes for model introductions in the fall, winter and spring.

Stock of Chrysler Corp., still flush with the most new products, is recommended by Needham, Kirnon and Bowyer.

Chrysler's new full-size T-300 pickup, its first new pickup in 20 years, and the Dodge and Plymouth Neon subcompacts should provide a boost.

General Motors stock is a Needham and Kirnon pick. While there is skepticism about this restructured company and its long-term product strategy, it does offer the opportunity for positive surprises. Its new S10 pickup and Jimmy S and Blazer S compact sport-utility vehicles hold promise.

Stock of Ford Motor Co. is suggested by Bowyer and assigned a "hold" rating by Kirnon. Expectations are high for its new Windstar minivan, the Ford Contour and Mercury Mystique replacements for the Tempo and Topaz, and its new small car, the Aspire.

Ford has a strong balance sheet, although its profit per vehicle and prospects in Europe are concerns.

Among automotive suppliers, Kirnon recommends stock of Maxco Inc., Magna International, Superior Industries and Automotive Industries, while Needham prefers Hayes Wheels International and Arvin Industries.

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