As I drive around town, I see many people spring cleaning their vehicles, so let’s put a few automakers through my Un-Common Sense process.
Investing in the auto sector, while enticing, must be done with caution, given the ebbs and flows of both vehicle sales and consumer tastes. Let’s examine some names.
Tata Motors Ltd. (TTM)
This company is firing on all cylinders. The luxury automobile space is booming, and current low oil prices are only accelerating that. Tata owns two of the world’s most iconic brands, Land Rover and Jaguar, and both are in full production mode to meet demand in Asia and other emerging markets. To put things in perspective, Land Rover sold 431 units in China in 2003, while in 2014, they sold more than 100,000. Demand for these two nameplates is growing by double digits in all their markets.
And even though the cars aren’t cheap, consumers are still lining up to own them, as witnessed by the six-month lead times to find certain models in the U.S. Domestically, Tata is the largest auto manufacturer in India, where there millions of consumers are aspiring to own family automobiles. Tata is offering a range of domestically produced automobiles to meet this demand.
In 2004, it acquired Daewoo, the second-largest truck maker in South Korea. Today, two-thirds of all heavy vehicle equipment that comes out of South Korea is Tata Daewoo. Also, since 2005, Tata has had a strategic partnership to produce Fiat cars and powertrains. Rolls-Royce also recently signed a contract for Tata to build jet engines.
With a dominant worldwide footprint in a growing industry and fierce brand loyalty, we love what Tata brings to the Un-Common Sense table. We initially bought TTM in January 2010 at $17.29. As of April 27, it trades at $42.11, for a return of more than 150%.
Fiat Chrysler Automobiles (FCAU)
The firm is another vanilla automaker that many analysts say isn’t any better positioned than the rest. But they’ve missed the story.
Initially, Chrysler dealers were reluctant to accept Fiat 500’s in their showrooms alongside Dodge RAMs. But that’s changed now, given the model’s sales success and penchant for driving traffic into the showroom. So, what’s preventing Sergio Marchionne (the Canadian chap who runs all of Fiat Chrysler) from bringing other Fiat models over? Nothing. Signs in dealer showrooms are already hung; the mechanics have already been trained. As a result, Fiat sold a record level of more than 58,000 cars in North America last year.
Looking at the firm’s competitors, GM and Ford have already experienced success in the European market, but Chrysler only recently caught up by starting production of Jeep and Lancia. The company is building American cars in Europe and selling them through the ready-made distribution network of Fiat dealers. The new Lancia Ypsilon was the fourth-most sold car in Italy in January 2015.
No other firm has this cross-pollination opportunity to generate a quantum sales leap. The company could also couple with an Asian manufacturer to go in that direction as well. Perhaps it will be Tata given that they are already working together?
And finally, the coup de grace: Ferrari, which Marchionne has promised to spin-off from Fiat in the U.S. in the next year. So there’s great demand to own shares in this brand. We initially bought FCAU in December 2014 at $11.17. It traded at $16.47 on April 27, for a return of 46%.
Tesla Motors Inc. (TSLA)
At the Detroit Auto Show in January 2015, CEO Elon Musk said his luxury electric-car company wouldn’t be profitable until 2020. If Tesla can’t build cars profitably, it fails one of our Un-Common Sense indicators. Why buy a company that doesn’t expect to make money for another six years?
While Tesla is an innovator in battery and drivetrain technology, it’s just another car with a large tablet as a centre console. And the competition isn’t standing still—any other manufacturers had their own electric cars on display in Detroit, including the Nissan Leaf, Kia Soul, Ford Focus and Honda Fit. So, it remains to be seen whether Tesla technology wins out or if it becomes a historical footnote. Further, Tesla’s sales this year have, in fact, dropped quarter-over-quarter.
While the company produces a great car, it’s still only a niche player. So, we don’t own TSLA. The stock traded at about $207 in April 2014, and was trading at $228.84 on April 27.