The stage is set for a recovery in certain industries. They've been hit hard the last three years, pounded by a slow economy. But now things are starting to change, and if you believe the worst is over, then these sectors should see good advances in 2011.
Car Companies: They're hiring. Toyota Motors (TM) just announced the re-opening of its Mississippi plant after being dormant for 2 years. They need 2000 workers. GM (GM) is hiring 1000 engineers and researchers in Michigan over the next 2 years focused on hybrid and electric cars. Chrysler is looking for 1000 engineers and others to create small and midsize vehicles in its partnership with Italy's Fiat. Fiat controls Chrysler. Ford is the most healthy of the U.S. producers, having never touched government funds.
All of the U.S. car makers are sending much better product to the marketplace and getting very positive responses. It's hard for GM to make enough Camaros which is now outselling the Mustang for the first time in decades. The new Camaro convertible will only increase sales. Ford (F) isn't waiting at the stop lights. Its newest offerings of hybrids and models like the Focus are flying out of dealers' showrooms. Chrysler's new Jeep is getting rave reviews for fit and finish and performance. Look for many more new models in 2012, especially from GM which recently got an upgrade from several analysts in anticipation of a refreshed Malibu, currently one of the best sellers for GM.
GM deserves some extra mention. It had a very successful IPO, selling 478 million common shares and 80 million preferred shares. It raised $23 billion this year, the largest IPO ever. The government did own 61% before the IPO but sold about half its position and now has about 34%. The company is much leaner and more efficient than before the bankruptcy. It got rid of most of its debt and high labor costs. Sales are increasing. Profits are way up, well over $4 billion in the third quarter.
Toyota is still selling lots of cars, though down somewhat in the U.S. because of lawsuits. But it's addressed those and other issues and will once again be a strong contender. All the while it's been fixing these problems, it's been increasing market share in India and Asia so expect good numbers from the biggest car maker going forward. More foreign makers you'll hear about next year: Tata Motors (TTM) (owns Jaguar/Land Rover); Kia; Hyundai.
The price of gas could slow some demand, but that should send consumers to hybrids and electrics faster than anticipated. GM is hoping so with a lot riding on its Car of the Year, the Chevy Volt, a hybrid that has a range of over 360 miles and is powered by electric motors as well as a gas engine that recharges those batteries. Ford has hybrids. More electric cars are coming or are here, ones like Nissan's Leaf, the S Model from Tesla (TSLA), the Karma from Fisker, BMW has several hybrids as do Mercedes Benz. Audi just introduced the e-tron, a forward looking electric sports car. This time around gas prices will matter but not as much as they have in the past. While electric cars are still a small part of total sales, they will increase. Hybrids will most likely be the vehicle of choice for many as they have larger trip capacity.
Expect a good year for cars. Balance sheets at most of the manufacturers are cleaned up. Sales are ramping. Interest rates are low to help finance more sales. The signs are very positive. If employment can show meaningful progress, expect lots of new cars on the road and much higher prices for car stocks.
Airlines: Consolidation was the name of the game in 2010. United and Continental merged and became United Continental Holdings (UAL). Then Southwest Airlines (LUV) and AirTran Holdings got together in late September to combine two low cost carriers. Two years prior, Delta bought Northwest Airlines (DAL). These new entities create more efficient fleets that make it easier for management to cover costs.
These mergers usually add routes and lower administrative costs, helping the top and bottom lines. They also allow for retirement of older planes and more miles out of newer models. For example, Southwest and AirTran share very few routes currently but with the merger each can add new ones from the other and cut certain administrative costs. Some analysts predict the new company will save $400 million annually once they are fully integrated. And Southwest is already profitable.
Economic conditions are improving and that's putting passengers in plane seats, especially during the holidays (weather notwithstanding). The airlines are improving the top line as they add certain fees (baggage, for one). Capacity has not expanded to meet demand, keeping fares high and planes full. Corporate executives are flying more, the most lucrative of all passengers, as the economy recovers. Fare hikes are sticking as seats available aren't expanding as fast as demand. Most airlines don't see adding significant capacity in 2011.
A couple of items to note: oil continues to trade higher, above $91 a barrel at this writing. If an airline isn't hedged, that will hurt its bottom line significantly. Another is new labor contracts on the horizon. With improved economic conditions expect labor to want more of the reward after years of compromise to help save the carriers. One more: watch for large debt loads, especially Delta which has a plan to cut its borrowings. When interest rates start up, the debt only gets heavier.
- Ted Allrich
December 28, 2010