Excitement is returning to cars -- and auto stocks

September 28, 1994|By Andrew Leckey | Andrew Leckey,Tribune Media Services

When I was a youngster, each year I tried to peek into neighborhood automobile showrooms to see the new American models before their formal introductions.

An aura of excitement surrounded the fall model changeover, with large sheets of paper taped onto dealership windows to obscure the view of those shiny vehicles.

That feeling of anticipation all but left the industry in recent years, but it's gradually coming back. There are some truly brand-new domestic models in U.S. showrooms or on their way, many taking direct aim at Japanese competitors.

A buying public that has learned to accept the upward trend in interest rates is kicking the tires again. U.S. auto sales rose 10 percent in August. That increase eased Wall Street's fears about the prior month's slowdown, which apparently was due more to production shortfalls than to a decline in consumer demand.

All this is translating to positive prospects for the once-downtrodden U.S. carmakers. Based on their strong financial positions, each member of the Big Three has the wherewithal to handle anything the economy can hand out and still remain healthy.

Over the next year, the stocks of U.S. carmakers could rise 15 percent to 50 percent. Estimates vary depending on the analyst and his or her expectations for the economy.

Total vehicle sales are projected to grow to 15.7 million next year from about 15.3 million this year. In 1996, the figure could exceed the 16.3 million record set in 1986, and 17 million isn't out of the question for 1997.

Here are some reasons for optimism during this model year:

* General Motors Corp. has the new Chevrolet Lumina, Monte Carlo and Blazer, as well as the sporty Pontiac Sunfire to replace the Sunbird. GM will unveil 84 new products between now and 1998, exceeding the combined new offerings of Ford and Chrysler.

* Ford Motor Co. has its new Ford Contour and Mercury Mystique four-door sedans, challengers to Japan's popular Toyota Camry and Honda Accord. Small American cars are becoming quite sophisticated. In addition, the new Ford Taurus, Mercury Sable and Ford pickup truck will make their debuts next year.

* Chrysler Corp., not to be outdone, will offer the Chrysler Cirrus midsize sedan, to be followed by the similar Dodge Stratus. They're two more entries following the trend toward focusing on the so-called lower middle segment of the market.

The days of "imperial management" under the likes of Roger Smith, Lee Iacocca, Henry Ford II and Donald Petersen are gone, so foolhardy purchases of foreign luxury manufacturers, savings and loans or automation companies are unlikely to occur again. Chrysler's Robert Eaton, GM's John Smith and Ford's Alex Trotman are willing to delegate authority to capable managers who understand international opportunities.

"This has traditionally been a feast-or-famine industry, but it has now found a way to succeed by keeping its pricing moderate and by promoting leasing," said Maryann Keller, an analyst with Furman Selz. "In every down cycle, we've had to worry about whether Chrysler would survive, but that's no longer a concern."

After bouncing around, the prices of automobile stocks look good.

"People who took profits in the auto stocks on economic fears should now reinvest, for we're just 2 1/2 years into a five-year sales cycle," advised John Casesa, an analyst with Wertheim Schroder. "I project 100 percent manufacturing capacity by 1996, a situation which last happened in the 1960s."

A prolonged sales cycle seems likely.

"Be patient with these stocks; buy at the low end of their trading ranges and realize they have some strong years left and will be offering higher dividends," said Michael Ward, an analyst with Kidder Peabody.

The Japanese will remain strong competitors, but the average $1,500 price differential favoring comparable U.S. vehicles is a factor.

"The Japanese carmakers will pull back their aggressive leases, and the Big Three can gain 2 to 3 percentage points in market share as a result," predicted Thomas Galvin, an analyst with C. J. Lawrence Deutsche Bank.

General Motors is recommended by all four analysts. It has a long way to go to show the results of its cost-reduction moves, but it should be able to post the strongest improvement.

Ford also is suggested for purchase by all the analysts. It already has done a lot right, but long-awaited European growth could be a future plus.

Chrysler is a pick of all the analysts except Mr. Galvin, who rates its stock a "hold" because the company has little non-U.S. market exposure and no more cost cuts are possible. In addition, he notes that Chrysler's market is shifting a bit from trucks to cars, meaning smaller profit margins. The January changeover to Chrysler's new mini-van will be disruptive, but the company should come on strong in the second half of the model year, the analysts say.

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