Avoid Auto Manufacturer Stocks
The Dynamic Wealth Report
April 2, 2008
The Stupid Things Businesses Do
I’m always amazed at the stupid things people do. From criminals who
videotape their crimes to the way some celebrities act, I’m always
astounded. Think Paris Hilton, Britney Spears, and Michael Jackson just
to name a few. I’d like to think that the business world is different .
. . but it really isn’t.
It’s no secret that I am no particular fan of the Airline industry. The
entire industry battles with extensive government oversight, aggressive
competition, and significant exposure to volatile oil prices. I struggle
to see how these companies survive. Let alone make money.
Yesterday my brother sent me a news article that just further reinforces
my thinking.
What was the news? It was nothing short of jaw dropping. Apparently an
airline named Flybe gave new meaning to low-cost airfare. They are
actually paying people to fly. That’s right. Flybe (sorry, I still can’t
get over that ridiculous name) is actually handing out cold hard cash to
a number of passengers just to fly between Dublin and Norwich. They are
paying their passengers between $60 and $80 US Dollars plus all they can
drink.
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This is insane. It’s another example of how screwed up the airline
industry is.
See, Flybe isn’t doing this just for fun. They have a deal with Norwich
airport to meet a target of delivering 15,000 passengers to the airport. If they deliver, they get a bonus of more than $500,000.
Now, I will admit it’s smart of the airline to do whatever it takes to
reach their goals. But really, who would sign a contract like that? And
what kind of government bureaucrat at the airport invented a bonus
structure like that?
But they aren’t the only one.
The only industry I dislike more than airlines is the auto industry. At
one time the auto industry helped build our great nation. Now with
decades of poor management and questionable business decisions the
industry is in a downward spiral it may never recover from.
I don’t recommend you ever invest in the automotive industry. As a
matter of fact, a long term “buy and hold” strategy with automotive
stocks could be a death sentence for your investment portfolio.
Let me tell you why.
First, the auto industry has the burden of government regulation. Now
don’t get me wrong . . . much of this is needed and important. The
number of lives saved by government mandated safety advancements is
incalculable. Seatbelts and airbags save lives.
But, the ability to pass along the cost of these government mandated
items is restricted. Every call by the government to change the auto
industry and their vehicles costs a great deal of money. Money which
often can’t be recouped by the industry.
A Broken Model?
Second, the automotive business model is broken. The costs in the auto
industry are out of control. Their profit margins are thin at best, and
costs are rising. Basic materials, like steel and plastics, make up a
significant portion of a car’s cost. Some estimates put the cost of
steel between 15% and 25% for the average car.
Have you seen the price of steel lately? The cost of plastics is up.
Remember plastic is made from oil. Even the price of platinum used in
catalytic converters is up. I could go on and on but you get the point.
The cost to manufacture a car is going up but competition and a poor
economy are keeping sale prices down.
Economic Exposure
That brings me to the third reason the auto industry is doomed. Exposure
to the economy. Think about it. The economy is slowing and people’s jobs
are in jeopardy. The last thing they’re thinking about is buying a new
car.
Oil prices are near all time highs. Which is causing gas prices to reach
levels we’ve never seen before in the US. People can’t afford to drive
the cars they already own. To add to the pain, the less a car is driven,
the less wear and tear it suffers. So even the demand for replacing worn
out vehicles is falling.
But there’s more . . .
Those are just a few reasons. I didn’t even get to the oversized pension
liabilities, crushing debt loads, costly product recalls, litigation
expense from product liability claims. . . . the list goes on and on. Needless to say, I’m not a big fan of the auto industry right now.
Ford (F), General Motors (GM), Toyota (TM), you should stay away from –
regardless of how undervalued they become. I recommend reviewing your
portfolio closely and sell any of these companies you might own. There
are better places for your money right now (and no, it’s not Flybe).
• Corn (Over $6.10 per bushel)
The July 2008 corn futures rallied on news earlier this week from the
USDA. Their stocks estimates anticipated increasing acreage dedicated to
wheat and soybeans, with limited increase in corn. This caused a rally in
corn, driving the prices to new highs.
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