A rough road for auto stocks

Zero-percent financing deals last year may hurt sales, stock values, in 2002

The "zoom zoom" in the US auto industry has suddenly turned into "sputter sputter," following sagging sales early this year. That adds up to some unhappy news if you're eager to invest in V6 engines and turbochargers.

"US auto-industry sales are good, and will be good throughout the year," says Arnold Kaufman, editor of "The Outlook," a financial review published by Standard & Poor's Corp. "It's just that 2002 sales will not equal the strength of sales for 2001, which were powered by heavy promotions, discounts, and zero-interest-rate financing arrangements."

The bottom line, says Mr. Kaufman: Analysts at Standard & Poor's are not currently recommending any major US automaker. The financial-services firm has a "hold" rating on Ford, and "avoid" ratings on both General Motors and Chrysler, a division of DaimlerChrysler AG.

S&P is not alone in its estimate. The consensus among brokerage house analysts is for investors to hold onto their auto stocks, but not add new issues to their portfolio. Most brokerage houses have "hold" ratings on both US and foreign carmakers.

"Our analysts are not recommending any US auto stocks right now, " says Bryan Piskorowski, market commentator for investment house Prudential Securities Inc. in New York.

"By providing huge financial incentives to buyers this past year, the US auto industry robbed Peter to pay Paul," says Mr. Piskorowski. "They moved a lot of vehicles. But that means that they have sacrificed extra sales for this year."

According to the US Department of Commerce, auto sales fell 4.3 percent in January from December, the third consecutive month of declines. But the declines - which were roughly equal for both cars and trucks - came after robust gains in the previous months. Last year, total US auto sales reached 17.2 million vehicles, second only to the record 17.4 million sales in 2000.

Aware of the likelihood of further erosion in sales, the industry is talking of possible sales of some 16 million vehicles in the US this year.

"The industry can best be described as 'dysfunctional' right now," following the huge gains last year, laughs Josh Peters, an auto-stock analyst with financial information firm Morningstar Inc. in Chicago. "But there's still a lot of momentum among consumers," he says. "Last year, vehicle sales surpassed most expectations. That could happen again this year."

For Wall Street, what happens to the $800 billion-plus automotive sector - which comprises retailers, suppliers, and partsmakers as well as car manufacturers, is important, but not as important as in years past, says Kaufman.

As recently as a decade or so back, the industry - along with such petroleum firms as Exxon, Mobil, Texaco, and Amoco - dominated trading indexes such as the Dow Jones Industrial Average and the S&P 500. But that's no longer the case. Of the 30 stocks in the Dow, for example, retailers, service firms, and computer-linked companies have come aboard, ending the dominance of the auto sector. Neither General Motors nor Exxon sits at the top of the Dow anymore. Today, the top slot is held by Wal-Mart, a mass retailer.

Thus, even without a blockbuster year from the auto sector, "we still expect the S&P 500 index to climb about 17 percent in 2002," says Kaufman.

But what if an investor wants to have a foothold in the sector, just to be ready for the next upward move in car sales?

Think mutual funds. Scores of funds have positions in auto stocks, as well as, in some cases, overseas producers listed on US exchanges.

At least three mutual funds have a stake of 10 percent or more in auto issues: the Fidelity Select Automotive Fund, the Icon Consumer Discretionary Fund and the Grand Prix Fund. (See chart at left.) These funds have an average loss of 2.3 percent this year through mid-February, compared to a loss of 2.5 percent for the S&P 500.

Similarly, the same funds were down 2.1 percent for the trailing 12 months, a period in which auto sales were very strong. But the S&P 500 was down a far more dramatic 14 percent.

Still, Mr. Peters of Morningstar remains cautious about all major automakers: "There is excess capacity everywhere," he says.

His solution: If you want a position in the auto industry, look for ancillary companies, such as suppliers. He likes Johnson Controls Inc., which makes batteries and interior components, and, to a lesser extent, Gentex, which makes automatic-dimming rear-view mirrors.

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