General Motors and Ford could be ready to turbo-charge. The two U.S. auto makers are admirably cautious about this year's prospects. There's a chance, however, that it's too soon for investors to put on the brakes.
Three blasts from the past could rev things up for the Motown manufacturers. More borrowers with weaker credit are buying new vehicles. Last year, $17-billion (U.S.) of securitizations backed by subprime auto loans hit the market, a near 50-per-cent increase on 2011. That should add extra oomph to the in-house financing units at Ford and GM.
Luxury cars are also on the rise, with their share of sales increasing by half a percentage point in 2012. The competition in that market is heating up, though. Ford's Lincoln and GM's Cadillac brands are more aggressively targeting the likes of BMW and Audi. Hanging in that race may burn up much of the extra profit, for now at least.
The biggest boost should come from selling more pickup trucks. With an average age of over 13 years, according to Citi, they're the oldest vehicles on the road. And sales are 95 per cent correlated to housing. With early signs of a recovery in that market, there's good reason to expect pickup sales to, well, pick up.
Trucks provide among the best pretax margins – some 20 per cent, as a midpoint of various estimates. They currently represent less than 12 per cent of total U.S. vehicle sales. Returning to the historical average of around 17 per cent, according to a GM presentation, would add an extra 810,000 or so to production this year, based on estimated overall sales of 15.3 million.
That's an extra $3.9-billion of profit, using an average price of $30,000 and a 20-per-cent tax rate. Assuming GM and Ford capture the same shares they have of full-size pickups, it would add $1.6-billion and $1.5-billion to their respective earnings. Pop that on an earnings multiple of 10 times and it suggests a jolt of about a third to the market values of both companies.
It may well take more than a few months for these three factors to truly ignite. When they do, though, Ford and GM should speed ahead.