Ride With the Auto Industry

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Kevin Kersten 05/12/2014

The auto industry is doing ok these days after a few rough years. The financial crisis caused sales to plummet and that put car makers in a heap of trouble. It was hard to borrow money and cars were just one of the things people put off buying. With sales plummeting for several years, cars got older and people kept cars longer. When the situation improved, that backlog caused stronger sales for a number of years.

While the US economy is growing, employment is still lower than people would like. The economies of Europe and China are also weak, which hurts exports to those countries. Overall, the auto industry should grow about 3% in the 2014. Sales are up, but they are not fully recovered and the average vehicle on the road is over 11 years old, a record age.  

American Axle ( AXL ) provides many of the axles that go into American cars. Sales go hand in hand with the auto industry. When the crisis hit, sales fell, but as the recovery came they returned. In 2012, American Axle did $3.2 billion in sales, more than twice the $1.52 billion in did in 2009 at the low the crisis. The company is still below 2007 and 2004 ($3.6 b) levels. Profits have followed revenues. While the company lost $23.73 a share in 2008, in 2012 the company made $4.87. In 2013, the company pulled in smaller profits of $1.23. Earnings have continued into 2014 with the company reporting $0.44 in the first quarter passing estimates of $0.40 and last year's comparable profits of $0.23.

While sales are improving in the auto industry, you might want to try to get a little more from the stock. The road to a life of leisure is long and you are not going to get there instantly. While the economy takes some time to grow and continue the recovery, you could sell calls to try to capture some extra returns. 


Chart courtesy of stockcharts.com

With the stock trading at $17.62, the October 18 calls have a bid of $1.30. If you buy the stock and at the same time sells the calls for a net debt of 16.32 (17.62-1.30) you can tack on 7.3% of downside protection and a 10.2% assigned return if the stock rises 2.1% over the next 163 days. That 10.2% over 163 days comes out to an annualized return rate (for comparison purposes only) of 23%. Investors should only sell calls on stocks they would like to hold long term, as a dip in the stock price could leave them with a losing position, and broad market moves can always affect positions as well. Still taking a company that makes axles and turning up the returns to 23% a year is both interesting and exciting.

 Car sales are up and the industry has been in recovery for a while. Sales have tapered off some since supply has caught up with demand, but the record age of cars means more people may still want a new car. Fulfilling that dream is going to take time, and we should not expect instant results. Looking at the data, we might easily invest in AXL but then turn around and sell a covered call to bring in some extra returns on the position.  A covered call could boost returns by 7.2% over the next 163 days.

That is one way to put some zip in your car, get a little cash back on the deal or stretching your make your auto investments go another mile.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Originally published on InvestorsObserver.com


This article appears in: Investing , Options

Referenced Stocks: AXL

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