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Why Auto Stocks Are Poised for a Breakout in 2013

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Car sales are forecast to remain brisk on pent-up demand following the recession. Here are two stocks that are well-positioned to take advantage.

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If you're a car enthusiast, you were likely paying close attention to the opening of the North American International Auto Show in Detroit Monday. It's the first-and arguably the most important-event on the automotive calendar.

The four-wheeled extravaganza kicked off by revealing the car and truck of the year for 2013. The former went to the Cadillac ATS, a surprise winner that fended off a high-powered field that included the Fusion from Ford Motor Company (NYSE:F) and Honda's (NYSE:HMC) revamped Accord. The Dodge Ram got the nod for truck of the year, outpacing Ford's C-Max and the Mazda (PINK:MZDAF) CX-5.

Pickup Sales Will Pull Their Weight in 2013

Carmakers are coming off a strong 2012 after drivers headed back to the showrooms to replace their old clunkers, which are now an average of 10.8 years of age-a new record. That, along with the release of pent-up demand following the recession and continued low interest rates, fueled US car sales to a 13% gain in 2012, to 14.5 million units. Industry analysis firm Edmunds.com isn't forecasting sales gains of that level in 2013, but it still sees 15 million vehicles leaving dealer lots this year, up 4% from 2012.

One segment that's expected to see particularly strong growth is pickup truck sales. According to research firms IHS Automotive and LMC Automotive, pickup sales will top 1.7 million units this year, up sharply from 1.1 million in 2009.

Last year, pickups accounted for 11% of total US vehicle sales, down from their historical norm of around 17%. This year, however, the recovering housing market is expected to put more cash in contractors' pockets, which will probably encourage them to retire some of the old workhorses they've been keeping on the road during the slowdown. In addition, the American Automobile Association is forecasting lower gas prices this year. That would further support pickup demand.

A big jump in pickup sales would be great news for carmakers, because they generate higher profit margins than cars. And the new truck models look particularly strong. Along with the new Dodge Ram, General Motors (NYSE:GM) is rolling out new versions of its Sierra and Silverado full-sized pickups. Ford is also previewing a new version of its F-150 that will hit showrooms in October 2014.

Ford Is Still the World's Top Pickup Truck Maker

It's hard to underestimate how important trucks are to the Detroit automakers: Unlike other segments of the auto market, the three companies still dominate the truck field, with a combined 93% market share.

The runaway leader in the segment remains Ford's F-Series. In 2012 the company sold 645,316 units. That was up 10.3% from 2011, making the F-Series not only the top-selling truck for the year, but the bestselling vehicle of any kind in the U.S. The latest figure topped the combined sales of the GMC Sierra and Chevrolet Silverado by about 70,000 units. The Ram trailed with 300,928 units, though that was up 17% from 2011.

However, despite the strong growth potential of Chrysler's Ram lineup, the company carries significant risks from an investment standpoint, as Jim Fink wrote during last year's Detroit auto show. A major drawback is the fact that Chrysler is owned by Italy's Fiat SpA (PINK:FIATY), which is highly exposed to the troubled European economy.

In the third quarter, Ford's net income was unchanged from a year ago, at $1.6 billion. However, its operating profits rose to $2.2 billion, or $0.40 a share, from $1.9 billion, or $0.34. That topped the consensus forecast of $0.30. Ongoing strength in the US offset losses in Europe.

Lithia Motors: A Direct Play on Rising US Car Sales

Investors looking to profit more directly from rising US car sales should take a close look at Lithia Motors Inc. (NYSE:LAD). Greg Pugh analyzed the stock in his October 9 article, Steering Toward a More Profitable Path. Lithia shares are up 6.7% since Pugh's article was published and 74.8% in the past 12 months, yet they still trade at a reasonable 14.6 times the company's last 12 months of earnings.

Lithia is the country's ninth-largest auto dealer, with stores throughout the midwestern and western US. The company sells new and used vehicles, as well as parts and service. Cars from U.S. automakers account for most of its new-vehicle sales.

In the third quarter of 2012, Lithia's revenue jumped 24.2%, to $888.4 million from $715.2 million a year earlier. New car sales-which accounted for 56% of the company's total-jumped 31.4%, while sales of used vehicles rose 24.7%. Earnings from continuing operations climbed 47.5%, to $0.90 a share from $0.61.

The company expects to earn $3.11 to $3.21 in 2013, up from its earlier projection of $3.07. The stock trades at 12.2 times the midpoint of its forecast range.

This article by Chad Fraser originally appeared on Investing Daily.

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