Barron’s: Auto Supplier Stocks Vs. OE Stocks

DETROIT, Mich.–Car stocks have struggled as light-vehicle sales around the world have declined. The Russell 3000 Auto & Auto Parts Index is up about 3% year to date, worse than the 8.5% gain of the Dow Jones Industrial Average. What’s more the Auto & Auto Parts Index has returned just 3% a year on average for the past three years, worse than the 16% average gain of the Dow over the same span.

But that might not be the winning strategy for automotive stocks this coming year, according to RBC Capital Markets. If that’s correct, then investors could see big gains in the shares of General Motors (ticker: GM) and possibly Ford (F).

The back story: Car stocks have struggled as light-vehicle sales around the world have declined. The Russell 3000 Auto & Auto Parts Index is up about 3% year to date, worse than the 8.5% gain of the Dow Jones Industrial Average. What’s more the Auto & Auto Parts Index has returned just 3% a year on average for the past three years, worse than the 16% average gain of the Dow over the same span.

In the past, auto parts companies did better than the auto makers. Since 2009, parts stocks have returned about 15% a year on average. Ford’s shares, by comparison, have returned about 9% a year over the past decade. General Motors stock has returned about 5% a year on average for the past 5 years. (Index construction and comparison is a challenge in the auto business because some auto makers, such as General Motors, sought bankruptcy protection in the last recession.)

What’s new: Before the last recession, auto makers often prioritized volume at the expense of price,” writes RBC analyst Joseph Spak in a research report published on Sunday. “Perhaps that was needed at the time given the bloated footprint and cost structure.” Spak believes that the race to the bottom on pricing to defend market share was a chief reason shares of auto makers underperformed shares of parts suppliers.

But this time is different, according to Spak. In the future, he thinks pricing and product mix will be a bigger driver of car maker profits.

Spak sees auto sales declining in 2019 to 16.7 million units, down about 3% from 2018. “But if [auto makers]can remain disciplined on price and the mix remains OK, moving out of unprofitable passenger cars into [sport]utilities and pickups, then profit shouldn’t be too impacted.” U.S. car companies make more money selling trucks than sedans.

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David Kiley is Chief of Content for The BRAKE Report. Kiley is an award-winning business journalist and author, having covered the auto industry for USA Today, Businessweek, AOL/Huffington Post, as well as written articles for Automobile and Popular Mechanics.