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Are American Car Makers Back in the Driver's Seat?

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After a bleak year, automakers appear to have once again found their traction. Here's what increased auto industry optimism means for the American economy and investors.

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After a bleak year of auto industry news ranging from financial ruin to mechanical malfunctions, automakers appear to have once again found their traction. JD Power and Associates recently reported that January total light-vehicle retail sales are starting the year ahead of expectations, with forecast sales expected to be 14% higher than in January 2010. Within that figure, new vehicle retail sales for January are up 23% year over year.

According to Automotive News the uptick in activity accounts for "the second-fastest pace in 17 months" that the auto industry has seen, driven both by business spending, competitive interest rates and finance offers, and rebounding consumer confidence. And consumers aren't the only ones ready for a brighter future. General Motors (GM) demonstrated its newfound confidence loud and clear last week in a "thanks, but no thanks" move, withdrawing a $14.4 billion application it had filed with the Department of Energy back in the days when talk of bankruptcy and bailout consumed auto industry headlines. On February 1 of this year, Thomson Reuters announced that "General Motors posted a 22% rise in sales for January."

At the 2011 Detroit auto show (officially called the North American International Auto Show) American auto companies finally appear poised to get back in the auto game, after years of playing "me too" behind foreign competitors. The all-new Chevrolet Sonic will now be turbocharged by Honeywell (HON) for 40mpg fuel economy. Such efficiency brings it into the ranks of other recently launched US turbocharged vehicle lines like Ford's (F) EcoBoost.

So what's driving the new attitude behind car sales? It seems to be a variety of factors. After years of bad economic news, consumers seem to be ready to get back in the buying game. Interest rates are at all-time lows and credit standards a loosening a bit, paving the way for financing options. Jeff Bennett, associate professor of automotive marketing at Northwood University in Midland, Michigan, says that "for customers looking at brands with excellent resale value, leasing might again become a good choice." He adds that resale values, particularly on three- to four-year-old vehicles, are also at all-time highs, allowing consumers to trade up.

What might the auto industry optimism mean for the American economy and investors? Bennett recognized the advancements of American automakers, noting that GM seems to finally "become more focused on what its customers want," citing the groundbreaking technology in the Chevy Volt and upcoming LaCrosse Hybrid system. Likewise, he sees hope for the post-bankruptcy Chevrolet brands Buick, GMC, and Cadillac, explaining that they "can be more precisely focused on different target markets. " He adds that he "would not be surprised for some publicly traded dealer groups to begin purchasing some GM dealerships in prime markets."

See Big Gains to Be Made in Platinum, Palladium for more investment ideas related to the auto industry.

While labor negotiations could present challenges, Bennett also sees Ford poised to have a record earnings year, particularly if gas prices rise. Its introduction of an all-new Focus and Fiesta could be a message primed for the ears of consumers who are unwilling to shell out money for fuel.

Chrysler has also made many improvements in a short period of time. Bennett calls the new Jeep Grand Cherokee "an outstanding vehicle" that is selling well and notes that the Fiat 500 debut could increase showroom traffic.

Stever Hague, owner of Proautobuying.com, also predicts that the big three American manufacturers will perform well. Hague views Ford as the best investment value, predicting that Ford stock will continue to grow. "Their quality continues to be excellent, consumers have really taken to their new models, and they've cut out a great deal of cost by getting rid of the tired Mercury line," says Hague.

But Christopher Kilcullen of America's Got Product argues that while the uptick in activity is a good sign, the direct impact on America's economy is lost as long as foreign vehicles remain in car buyers' consideration set.

His group is devoted to supporting products and companies that support the US economy. In August 2010, it produced a score card to analyze "the economic footprint that each [automobile] purchase leaves on this country." The America's Got Product analysis revealed that in one month, Americans purchased 997,000 cars and trucks. After removing purchases of Honda (HMC), Toyota (TM), and other foreign brands that were manufactured in America, along with the domestic models, there were 242,000 pure imports remaining. (Kias, Lexus, Volkswagen, and other foreign brands that were not built in America).

Assuming an average purchase price of $30,000, the study concluded that if all cars were purchased American, "over $7 billion would have been left" in America's economy, in just a 30-day period.

Bennett's take on the impact on the American economy is a bit more hopeful. He predicts that "2011 new vehicle sales will reach 13.2 million units," and notes the overall improvement in auto sales will create momentum elsewhere. "Suppliers are introducing some interesting new products. For example, ZF is introducing a nine-speed automatic transmission for Chrysler vehicles. I look for improvements in battery technology and other developments to improve supplier profits and possible stock values," says Bennett.

He also expects the auto sales "trickle-down" effect will result in increased manufacturing and possibly labor demand, which could ultimately put laid-off employees back to work.
No positions in stocks mentioned.
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