Car Makers Bad Business Model
The Dynamic Wealth Report
December 26, 2008
Editor's Note: The research team at Hyperion Financial Group has
been working tirelessly all year to bring you great investment ideas. Some of our ideas worked better than others. Sometimes we were on the
mark, sometimes we missed a bit. Either way, we’re constantly striving
to bring you original money making ideas in some of the toughest market
environments. Here’s a highlight from this year….
Originally published in the April 2 edition of
The Dynamic Wealth Report…
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.
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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.
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? Just another example. . .
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 stupid business decisions, the industry is
in a downward spiral it will 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
their 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 is keeping sales 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. This 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. Needless
to say, I don’t like the auto industry much.
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’re many better companies to invest in.
• ProLogis (PLD) was upgraded to a “Buy” at
Deutsche Securities. The Company was upgraded because their recently
completed financing improved the balance sheet.
• Cameco (CCJ) was downgraded by Friedman Billings to
“Market Perform”. The stock’s already down some 62% this year already.
• Sterne Agee started research coverage yesterday on Bank of
America (BAC) with a “SELL” rating. Again, I ask, why bother to
write research on a company you think people should sell?
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