First Trust NASDAQ Global Auto Index (
) raced ahead 22% the past three months, leaving theSPDR S&P
500 ETF (
) in the dust with a 6% gain. On a one-year basis, CARZ gained
18%, not much faster than 16% for SPY. The ETF holds 35 stocks of
auto makers from 10 countries valued between $500 million and
Here's an overview of five catalysts driving this ahead of the
1. Consumers are buying cars at a healthy clip although
they're far below pre-recession levels.
The U.S. SAAR (seasonally adjusted annual rate of sales) rose
steadily from a rate of about 14 million in July to about 15.5
million in November and December, Credit Suisse analysts noted in
a "2013 Auto Sector Outlook" released Jan. 11. That's gaining on
the 16.15 million vehicles sold in 2007.
Consumers bought about 78.8 million cars globally in 2012, up
4.4% over the prior year, according to Moody's. The economic
research firm estimates 81.1 million will be purchased this year,
good for 2.9% growth. Sales are expected to dip in Western Europe
and Japan by 3% and 9.1%, respectively. Sales are projected to
rise in the U.S. and China by 3.6% and 8.5%, respectively.
2. China is underpenetrated and presents a massive
growth opportunity for car makers.
In the People's Republic, there are only 70 vehicles per 1,000
people -- one-tenth the average of the seven largest economies,
according to Scotiabank's Global Auto Report issued in December.
What's more, more than one-quarter of the world's key
vehicle-buying age group -- 40-49 years old -- live in China.
They have the most disposable income and their share of the
population is expected to reach 17.4% by 2015, up from 13.5% in
"Furthermore, a recent study estimated that 66 million Chinese
households will be able to buy a new car by 2013 -- a level 50%
above the number of cars currently on the road in China,"
Scotiabank's report stated.
3. The inventory-to-sales ratio is rather low compared
to its historic average.
From 2003-2008, the motor vehicle manufacturer
inventory-to-sales ratio averaged approximately 2.62, according
to Briefing.com's chief economist Jeffrey Rosen.
At current inventory levels, the inventory-to-sales ratio
would drop to 2.06 if production levels remain at 2012 levels
this year and sales rise to 15.3 million as forecasted. For the
inventory-to-sales ratio to its pre-recession average of 2.62,
U.S. auto makers have to boost production by 4.6% -- or 705,000
vehicles -- from 2012 levels. Growth rates will likely remain
flat atGeneral Motors (
) andToyota (
) butFord (F) and Chrysler will have to lift output significantly
to bring inventory-to-sales ratios to their historic norms.
4. CARZ may be considered a value play for investors focused
on price ratios. CARZ trades at price-to-forward earnings ratio
of 10 vs. 13 for the SPY, according to Morningstar. CARZ trades
at 1 times book value, 0.4 times sales, 4.6 times cash flow while
yielding 1.4%. By contrast, SPY trades at 2 times book value, 1.3
times sales, 7 times cash flow while yielding 2.25%. CARZ also
trades at cheaper valuations than industrials on average.
5. Worries over Europe's economic woes have dissipated. GM and
Ford said losses in Europe would be no worse in 2013 than 2012,
according Credit Suisse. And the fiscal cliff "resolution" has
driven investors in riskier assets.
"With sentiment getting overheated," Credit Suisse analysts
see the auto sector hitting the brakes over the next month or
two. They see companies issuing cautious 2013 guidance as the
sales boost from people having to replace their cars following
the Superstorm Sandy wears out and worries over the U.S. spending
cuts and the debt ceiling debate weighs on the market.
"If we are right about a correction for the group, investors
may want to be tactical about entry points and/or trading around
existing positions," Credit Suisse analyst Christopher Ceraso and
his colleagues wrote. "For the stocks to move much higher,
investors have to either willingly overpay for the near-term
production environment (something that hasn't happened since
we've been doing this analysis), or expectations for North
American or European production have to move higher."
Top 10 Holdings in First Trust NASDAQ Global Auto ETF and
Percentage of Assets (as of 1/18/2013)
Ford Motor 8.71%
Daimler (DDAIF) 8.26
Honda Motor 8.15
Toyota Motor 7.86
Hyundai Motor (HYMLF) 6.85
Renault (RNSDF) 4.10
Porsche Automobil Holding 4.02
General Motors 4.00
Suzuki Motor (SZKMF) 3.98
Harley--Davidson (HOG) 3.92
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