Discounts driving car market

Autos: Aggressive price cutting has revived a dismal year for the Big Three manufacturers.

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July 17, 2005|By Andrew Leckey

For U.S. automakers, it's out with the old and in with the new, which has been a bonus for car buyers but isn't guaranteed to be as good a deal for investors.

This summer's aggressive discount pricing by the Big Three automakers has jump-started a dismal 2005, and some analysts say it might position the industry for a comeback next year, though that belief isn't universal.

Inventory is being reduced in a rush started by General Motors Corp.'s program to give all buyers its employee discount, which produced a 47 percent sales gain in June for its best month in 19 years.

Other automakers have followed suit. That's good for consumers, but it might not be good in the long term for shareholders. It perpetuates the belief that American cars are bought only on deals and not for their intrinsic worth.

In the short term, though, these incentives can help profits. Carmakers still make a little money on each sale, and they help clean out a backlog of inventory. There is some concern that the current rush to buy could hurt sales of next year's models, but some analysts say increased traffic in dealerships will extend into the fall.

The quality of domestic vehicles has improved, but the difficulty is in altering perceptions of motorists who years ago abandoned them for imports, which has driven the Big Three's market share lower.

The domestic automakers hope summer price cuts coupled with reasonably priced new fall models will improve profits and encourage shareholders.

"Carmakers are saying, `Since 2005 is abysmal already, let's get it out now and then have a huge swing to profitability and increased production in the first quarter of 2006,'" said Kevin Tynan, an automobile industry analyst with Argus Research in New York. "Like a very old Chevy Caprice, they're running this year until it dies."

Car companies have money. The recent reduction to "junk" status of bonds of GM and Ford and their credit businesses was embarrassing and makes public financing more costly. But there's little practical effect because the firms were already well-financed and have loads of cash.

Financing arms General Motors Acceptance Corp. and Ford Motor Credit "could do all the financing they need for years and years by just packaging their good car loans as receivables and selling them with AAA ratings to investors," said David Healy, an auto analyst with New York-based Burnham Securities. "The real problem GM and Ford have is that they're coming out with well-executed but boring vehicles."

There are worthy auto stock investments, experts said, though mostly as low-priced short-term purchases to be sold on an upturn. Looking longer term, problems in the economy or labor relations could hurt results, they said.

The Big Three have paid the price for their troubles, with Ford Motor Co. stock down 30 percent over 12 months, GM off 21 percent and DaimlerChrysler lower by 11 percent. Ford and GM results have been rocky in recent months. Ford shares fell 7 percent over two days in late June after it lowered its annual profit forecast for the second time in two months. In April, GM declined to give an annual profit forecast after reporting a shocking $1.1 billion first-quarter loss.

Investors will be looking closely this week at earnings results from Ford on Tuesday and GM on Wednesday to see whether they can improve their fortunes.

The consensus of analysts reported by Thomson Financial is for all of the Big Three to make money in the second quarter, with Ford and GM likely to post sharply lower profits from 2004 levels. DaimlerChrysler is expected to see a 50 percent jump in earnings over the year-earlier period. For investors, best bets might be car parts suppliers that benefit most from increased sales because they aren't selling to carmakers at deep discount.

"Asian automakers are doing a very good job, Europeans are treading water and domestics continue to struggle but aren't in imminent danger" of bankruptcy despite their bond downgrades and other problems, said Brett Hoselton, auto analyst with KeyBanc Capital Markets in Cleveland. "With suppliers, life's good for companies like BorgWarner and Gentex, though some weaker firms filed for bankruptcy."

Healy and Tynan both like Daimler- Chrysler stock. Chrysler is stealing market share from GM and Ford with its Hemi engine image and Chrysler C300, Dodge Magnum and Dodge Charger. Countering that is a collapse in Mercedes-Benz profitability on reliability problems and difficulty in attracting younger buyers. Still, many expect Mercedes quality to return to prior levels.

Tynan sees short-term potential for the stock of No. 2 U.S. carmaker Ford, whose Mustang is a hot seller and F-150 pickup is the nation's best-selling truck.

With truck and SUV sales down on higher fuel costs, Tynan says, Ford made the right move in emphasizing lighter-weight vehicles such as Escape and Freestyle built on car platforms. It is in the forefront of U.S. energy efficiency with its Escape hybrid.

GM is reacting to the truck and SUV sales decline differently. It believes the key will be the introduction of its GMT 900 platform for those vehicles this fall. If it is correct, this will snatch sales from Ford. Trucks are the last bastion of American companies, with many loyal customers never considering foreign models.

Tynan considers stock of GM, the world's largest automaker in total vehicle sales, a "real bargain." He would buy now and sell if it rises in the first quarter of 2006.

Billionaire investor Kirk Kerkorian also saw a bargain in GM stock, sharply increasing his stake in the spring and leading to a rebound in the automaker's shares.

Andrew Leckey is a Tribune Media Services columnist.

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