Automobile stocks are out of favour with fund managers despite a strong showing by the domestic cons...
Automobile stocks are out of favour with fund managers despite a strong showing by the domestic consumer.
David Currie, head of US equities at Edinburgh Fund Managers, says auto company earnings are peaking with Ford posting a 15% increase in earnings in dollar terms in the first quarter of this year.
Ford saw its shares fall by 17% in the 12 months to 2 May in dollar terms and the stock is on a P/E of 9.09 times.
Currie, who does not hold the stock, says: "It is very difficult for Ford to buy back shares as the Ford family still owns a sizeable chunk of the company.
"They do not want more shares but also do not want to sell them because of tax liabilities. Ford has a lot of cash burning a hole in its pocket and there has also been talk of it moving into automobile insurance, which is an incredibly competitive market.
"Ford should be looking to use its cash pile wisely from an investor's point of view but if it is looking to buy assets that are not core, it is not something we would be interested in."
James McLellan, US fund manager at Clerical Medical, has a zero weighting in the auto sector as he believes the economic environment will worsen for auto stocks.
He says interest rates are likely to increase in the US over the coming months, leading to a potential slowdown in the economy and slower car sales. He adds he would consider investing in the sector on a trading basis if stocks such as General Motors or Ford fell back significantly.
A further problem for the sector is a competitive threat to the auto components firms such as Delphi Automotive Systems and Genuine Parts.
The large US car manufacturers are setting up an auto parts exchange to get components more cheaply, which is likely to squeeze the auto suppliers' margins.
Genuine Parts saw its share price fall by 11.88% in dollar terms in the 12 months to 2 May while the S&P Auto Parts & Equipment index fell by 25.85% over the period between 3 May 1999 and 2 May this year.
Currie is holding General Motors as a restructuring play. The firm is spinning off its satellite division GM Hughes in conjunction with a share buyback.
General Motors is offering 1.065 shares in the satellite venture for each GM stock tendered by shareholders.
General Motor's share price has grown by 23.71% in the 12 months to 2 May and the stock is on a P/E of 10.71 times. The firm saw its first quarter earnings fall by 2% in dollar terms.
Currie says: "We bought General Motors a month or so ago with one of the main reasons being it is an unbelievably cheap stock, it is in the portfolio as a defensive play but the timing of the cycle is not ideal for auto stocks.
"A better time to buy these types of companies is when the economy is coming out of recession.
"What you have got at the moment is that auto companies earnings are as good as they are going to get."
Currie sees car sales slipping back from a cyclical peak during the next year.
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