“What do you make of overall car market? By the way, we’ve got Ford’s auto sales down 5.1% in the month of September. That’s not a very good showing. Overall the American car market is going to shrink to below 10 million vehicles this year.

I think we have some quick revisionist history happening on the cash for clunkers plan. It was not the successful stimulus program. It was a quick way to spend $3 billion but there’s no lasting effect. The market’s back where it was in August. I got a preliminary number from Chrysler. I’ve got to go through this more thoroughly but the preliminary number is they were down 42% in that’s compared to a very weak September of last year. What do you make of that?

Not a surprise at all. Exactly where they were before cash for clunkers and back there again. Nobody’s buying Chryslers.”– Fox Business Network 10/1/2009

The government’s Cash for Clunkers rebate program was generally very well received as the program ignited demand for vehicles in late July and August.  However, many were skeptical that the program would in fact boost sales or simply pull these sales from the future.  The temporary nature of the CARS Program was well known to manufacturers, dealers and consumers, so everyone wanted to take full advantage of the rebates while they were available.  Anyone who was in the market for a car and qualified for the program would have considered buying their car during the program.

Now, we are seeing the post-clunker slowdown as the major auto-manufacturers are reporting September sales results that are below expectations.  Ford (F) was slightly worse than expected falling 5.1% (5.8% if you exclude Volvo).  Nissan saw their sales drop 7%.  Chrysler looked the worst of the slowdown, with sales falling 42% and more than 61% for the Chrysler brand.  But in Chrysler’s case, the comparison is to pre-bankruptcy filing, which certainly skews the results.(Note: General Motors (GM) had not yet reported their results at the time of writing, but they are expected to be far worse than a year ago.) 

These comparisons are versus sluggish sales one year ago, not against the rebate fueled sales totals of last month.  The seasonally adjusted annual sales rate slid to 9.3 million vehicles, this important metric stood at over 10 million vehicles the past two months.  However, the annual sales rate was better than Edmunds.com analysts had predicted mid-month at 8.8 million vehicles.  This improvement reflects an up-tick in sales in the second half of the month.

In addition to the lack of demand after Cash for Clunkers, auto dealers were dealing with the industry’s lowest inventory levels in 24 years.  This only exacerbated the problem as consumers were left with fewer options and dealerships had less incentive to make deals.  However, this data was well known to industry analysts and sales results still fell short of their projections.

This outcome was not a surprise to many who were critical of the Cash for Clunkers program, but time will tell how long this lack of buyers will persist.  If this was simply a one month hiccup, then it would be hard to say that the program was a failure.  Of course, the trend in the second half of the month is somewhat encouraging.  However, should auto sales continue to disappoint through the end of the year, the program would have been a complete waste of money.

“The Nikkei, apparently a newspaper in Japan’s Wednesday edition is out already. They are saying Toyota will slash global production by 10% or one million vehicles as early as this fiscal year to raise utilization at underused plants. They will slash by 10% or one million vehicles. Shares are higher by 1.5%.” — CNBC’s Power Lunch 8/25/2009

Toyota Motors (TM) has announced they will be cutting production by 10% in anticipation of a slacking demand following the “Cash for Clunkers” program.  The program has been wildly popular as the first $1 billion appropriated for the rebates was used in just over a week, and then the next $2 billion allotted only last a few weeks longer.  All in all, the initial estimates state that through Monday a total of 625,000 vehicles were purchased for a $2.58 billion in vouchers.  The deadline for dealerships to submit their applications has been extended to 8pm EDT Tuesday, as many dealers have had staff working late into the night to complete the necessary paperwork.

The Car Allowance Rebate System (CARS) aka Cash for Clunkers program had dual purposes.  The first goal was to excite demand from the U.S. consumer, and hopefully help the struggling auto industry catch a break.  The other stated reason would be to replace so-called gas guzzlers on the road with more fuel efficient vehicles.  Toyota easily fit the bill for fuel efficiency and the most popular car sold through the program has been the Toyota Corolla.  Toyota claimed three of the top five vehicles for sales through the program, which undoubtedly will help them show their first increase in auto sales in the last 13 months.

With the program ending, dealers and automakers are left with one big question: Now what?  It is clear that the government’s efforts have borrowed demand from the future for use today.  The government rebates did not create demand, instead they incentivized buyers to act more quickly than they otherwise would’ve.  Now, most everyone who had thought about buying a car in the near future must have at least considered taking advantage of the program.  There will be fewer sales over at least the next few months as a result.

Toyota is the first we have seen announce production cuts, although we would not be surprised to see others follow suit.  Toyota, which currently has production capacity of 10 million vehicles per year, will be reducing that capacity to 9 million as soon as this fiscal year.  Furthermore, production volume is still excepted to fall well short of capacity, about 6.7 million vehicles this year.  There is simply no need to restock inventory as quickly when Economics 101 teaches us that sales are undoubtedly going to suffer.  Plant closures, shortened work weeks, and more layoffs are the obvious implications of such a slowdown.

From an equity perspective, we have a Fairly Valued stance on TM at the current price level.  We cannot blame them for slowing down their production capabilities, it only makes sense.  However, we have a hard time seeing a catalyst for sales improvement through the end of the year.  Toyota got probably the most benefit of any automaker from Cash for Clunkers, and time will tell how much it impacts demand going forward.  From an equity investor standpoint, there are some significant challenges in the months ahead that makes investing in them a bit too risky.

Call the Fed, my favorite burger joint down the street is experiencing distress.  Yeah, I’ll take a double with cheese, hold the TARP.

Not really sure how Detroit sees this all working out.  Does the UAW and the “big” three (two public, one private, all three collapsing) still think that they are entitled to some sort of government intervention?  The new White House Administration has made it clear that they are ready to help Detroit, and Speaker Pelosi can’t be any more vociferous of her own intent.  So the question is, where, oh where, will it end?

The automakers priorities have been out of whack for quite some time now.  You cannot help but laugh when you hear GM is the worlds leading purchaser of Viagra.  The Detroit News reported in 2006 that GM spent $17 million dollars on the “little blue pill”.  Admittedly, this is a relatively small portion of the more than $5.6 billion per year that GM spends on health care for their employees (more than $1500 per car in 2006), but the Viagra problem is a symptom of an overall cost management illness.

Thomas Friedman, Pulitzer Prize winning columnist and author (”The World is Flat“), has some interesting insights into the situation in yesterday’s New York Times.  He first recounts the history of our esteemed car companies and their insatiable appetite for funds to, … uh… innovate:

Last September, I was in a hotel room watching CNBC early one morning. They were interviewing Bob Nardelli, the C.E.O. of Chrysler, and he was explaining why the auto industry, at that time, needed $25 billion in loan guarantees. It wasn’t a bailout, he said. It was a way to enable the car companies to retool for innovation. I could not help but shout back at the TV screen: “We have to subsidize Detroit so that it will innovate? What business were you people in other than innovation?” If we give you another $25 billion, will you also do accounting?

How could these companies be so bad for so long? Clearly the combination of a very un-innovative business culture, visionless management and overly generous labor contracts explains a lot of it. It led to a situation whereby General Motors could make money only by selling big, gas-guzzling S.U.V.’s and trucks. Therefore, instead of focusing on making money by innovating around fuel efficiency, productivity and design, G.M. threw way too much energy into lobbying and maneuvering to protect its gas guzzlers.

This included striking special deals with Congress that allowed the Detroit automakers to count the mileage of gas guzzlers as being less than they really were — provided they made some cars flex-fuel capable for ethanol. It included special offers of $1.99-a-gallon gasoline for a year to any customer who purchased a gas guzzler. And it included endless lobbying to block Congress from raising the miles-per-gallon requirements. The result was an industry that became brain dead.

Nothing typified this more than statements like those of Bob Lutz, G.M.’s vice chairman. He has been quoted as saying that hybrids like the Toyota Prius “make no economic sense.” And, in February, D Magazine of Dallas quoted him as saying that global warming “is a total crock of [expletive].”

These are the guys taxpayers are being asked to bail out.

            - Thomas L. Friedman, NYT, Nov. 11, 2008

Friedman has a great knack for showing readers where we have been in very understandable terms and examples.  He continues on to propose that Steve Jobs take a year off from Apple (AAPL) to come create the first “iCar”, which no doubt will run on MP3’s available only from the iTunes store.  He really may be on to something there.

When looking at our ratings and valuations on companies like Ford and GM, it is really hard to reconcile the realities of Detroit with the opportunities to invest in depressed stocks.  Well, maybe its not that hard.  Right now, on a 13 week basis, GM and Ford are down around 70% each.   The slide for GM has been an unrelenting death march from the high $80’s in 1999 to its present day.  Ford’s decline from 1999 was a high price of $36 and change.  Both companies have failed miserably to innovate or compete with their foreign counterparts.

Looking at the scatter plot chart, it is true that Ford and GM get a “Greatly Undervalued” rating right now from the Ockham methodology.  We won’t drop coverage on them just because we think they are systemically broken (that’s Wall Street research).  Instead, we basically sit here waiting to see if the government will again burn money by throwing it into the Detroit furnace.  Please note, however, that when visiting our site, we slap an “ALERT” sticky note on both Ford and GM to highlight that our ratings can’t be viewed in a vacuum.  While we advise doing a lot of homework on all companies, and think our clients need to look at multiple sources for their research, we also recognize that some truly deserving companies should be pointed out for the complete debacles they have become.

When looking at the major automotive manufacturers, we find Honda (HMC) and Toyota (TM) to be far more interesting (and they don’t get the yellow sticky note of death on our website.)

Genuine Parts Company (GPC) is the Atlanta-based distributor of automotive replacement parts, electronic components, industrial replacement parts and office products for much of North America. The company’s biggest business component is its auto parts subsidiary and its most recognizable brand is NAPA.

GPC shares have pulled back with the broader market over the past few months and now represent a compelling value using Ockham’s research methodology. Fundamentally, we would expect auto replacement parts manufacturers to benefit from the carnage plaguing auto makers at present. With the credit crunch drying up funding for affordable leases, high gasoline prices cratering the resale value of large SUVs, trucks and cars and the moribund economy causing consumers to tighten their belts, it is safe to assume that the average American is going to be driving his or her current vehicle a bit longer than might have been the case three years ago. As such, we would expect to see auto replacement parts manufacturers benefit from this trend as more and more people drive their automobiles for longer periods and thus spend more money on replacement parts.

From a valuation standpoint, GPC peaked out at just over $50 a share in June of 2007 but has now worked its way back down to the low forties. At this level, the stock pays a nice dividend (3.7% yield) which it has a strong track record of increasing on a consistent basis. GPC’s Price-to-Sales multiple has traded in a range of between .63x - .79x over the past ten years. The current Price-to-Sales multiple is .62x.

Looking at Price-to-Cash Flow, the ten year range is 11.47x to 14.37x. The stock currently has a Price-to-Cash Flow multiple of 11.12x. As such, at current valuation levels, GPC is trading at a fair discount to the stock’s average historic multiples for both Price-to-Sales and Price-to-Cash Flow—normally an attractive entry point for new investment.

Genuine Parts is a well managed company. It is doing well in an otherwise difficult economy, showing solid, if less than spectacular earnings growth. Management recently raised the stock dividend and has been selectively buying back shares. The company has also made a few minor strategic acquisitions of late, so management is keeping its eye on the ball while many other companies fight for survival.

GPC is a high-quality company with strong management, a nice dividend yield and a sustained record of annual dividend increases. The fundamentals of its core business appear to foretell many years of having the wind at its back. While domestic auto makers may face a very dicey future, auto replacement parts makers should benefit from an aging auto fleet. Ockham Research rates GPC a Buy and would recommend that patient, income-oriented investors ponder adding these shares to a diversified portfolio.