The Auto Industry Renaissance Is for Real
Shares of Ford Motor (F) , for example, quickly surged to nearly $20 by early 2011. And GM's(GM) late-2010 IPO saw such a hearty reception that investors scored a quick 20% gain in just a few months. Many auto parts suppliers also saw their shares rise up to fresh post-crisis highs.
And then, the bottom fell out -- again. Ford, GM and those suppliers have seen their stocks fall 30% or even 40% from those peaks over the last year as investors suddenly lost their enthusiasm for this resurgent sector.
Remarkably, the auto industry's outlook is even brighter than it was a year ago, and for investors willing to ride out the storm, major gains can be made.
For specific auto industry stocks to consider, check out " 5 Cheap Stocks for an Auto Industry Renaissance ."
The Leverage of Volume
After selling 16 to 17 million units annually, the auto industry suffered a massive shock as industry volumes fell to just 10.4 million. Decent profits morphed into huge losses, sending some players into bankruptcy, while others barely stayed afloat. Many auto parts suppliers saw their stock move below $1.
But that shock may have been the best thing to ever happen. In an industry known for bloated cost structures and barely competitive products, the systemic shock led to a wave of cost cuts and better product line-ups.
Just a year after the nadir of the economic crisis, profit margins started to sharply rebound, and with lower costs in place, those were on path to reach record levels in just a few short years. Though industry sales rose just 11% in 2010 to 11.55 million units, almost every industry player managed to move back into the black.
Ford, as an example, saw operating profit margins rebound to 5.8% that year, the company's best showing in a decade. The company's stock rallied in 2010 as investors started to anticipate how much higher those margins could rise as the auto industry got back on its feet.
The Pause Before the Next Move Up
In hindsight, investors jumped the gun on the industry's profit margin surge. A rebounding economy meant that prices for raw materials such as steel and rubber moved back up from decade lows. Labor expenses, which had fallen dramatically thanks to revised union agreements, needed to tick back up as delayed raises and bonuses were finally granted. Perhaps of greatest concern, signs emerged that Europe was entering into a downturn that would lead to moderately falling sales on the Continent.