Category Archives: Autos

auto inventories

December 5, 2013 By in Autos, economics, Industry Analysis, the inventory problem: stockout vs. carrying costs Tags: , , , , , 1 Comment

I’m not a big fan of the auto manufacturing industry.  It’s highly cyclical and capital-intensive.  It’s plagued by chronic overcapacity and generally terrible management.  Much of the technology involved in making cars has migrated over the years to component manufacturers, making it harder for brands to differentiate themselves from one another.  On top of that, the industry employs so many people that national politics can play a large role in how it fares.  Just look at GM.

Despite all this, the industry does have its moments.  I’ll confess to, at one time or another, having owned shares in Peugeot, Nissan, Toyota, Honda, Porsche, VW, Hyundai and BYD–plus bunches of parts manufacturers and the occasional regional Asian car distributor. Today I even own a tiny position in Tesla–thanks to the encouragement of my younger son and one of my brothers-in-law (I haven’t done any of the serious work, so this is not an endorsement of TSLA.  The Wall Street consensus for TSLA earnings in the year ahead is $1.50, meaning that the stock is trading at 100x.  That estimate is doubtless wildly wrong.  The investment issue is whether it’s too high or too low.)

Let me switch from incipient anti-commodity industry diatribery to the current auto inventory situation in the US.  I think I know what’s going on.

Take Ford (F).

During 3Q13, US wholesale (i.e., sales to car dealers) unit car volume was up by 16%, or about 216,00 cars, year-on-year for F.  That increase pushed operating profit from auto sales up by a whopping 61%, after subtracting special charges from this year’s figure (the relevant information is on page 51 of the 10-Q).

Unit profit per car averaged $1,354 during 3Q12, $1,877 per car in 3Q13.  Yes, a difference  …but what’s $500?  Where’s the operating leverage?

Look at the data in a different way.  If we ask what the unit profit was on the incremental volume in 2013, the answer is $5,100 a pop.  In other words, once F’s sales covered fixed costs and reached 2012 production levels, the unit profit on anything above that was about 4x the average.  This is where the operating leverage is.

This implies

…the loss incurred if a customer leaves a Ford dealership without buying because the car he wants isn’t in stock is much higher than normal for F today.  That customer isn’t going to come back; he’s probably going to buy a Honda instead.  Given that the cost of financing dealer inventory is basically zero, it makes no sense, either for F or for the dealer, to skimp on what’s on the dealers’ lots.  Especially as early in the model year as we are now.

Yes, there may be trouble down the road from too-large inventories at some point.  But if the industry dials back production from the current 90% of capacity to, say, 80%, maybe there won’t be.  For F at least, the cost of some manufacturing downtime early next year will likely be dwarfed by the extra profits being achieved at present.

That’s what the media is missing.  On the other hand, that information isn’t sound-byty, and it’s on page 51 of a 79-page, small-print 10-Q.  No reporter or academic is going to bother looking that deeply.

supply chain disruptions: first Fukushima, now Thai flooding

October 17, 2011 By in Autos, Current Market Thoughts, emerging markets, Industry Analysis, Recent Market Action, Technology, Trading Tags: , , , , , , , , , Leave a comment

Chao Phraya River flooding

Thailand is suffering extensive flooding because of unusually severe monsoon rains over the past few months.   Several hundred people have been killed and a number of key industrial parks remain underwater.

Although the worst appears to be over, authorities warn that the Chao Phraya River would remain very high for weeks, as more rainwater from the north plus the water accumulated in flooded areas gradually makes its way south to the Gulf of Thailand.

Although the flooding hasn’t received anything close to the media attention outside Thailand that the nuclear plant meltdowns in Fukushima prefecture did outside Japan, it still may have have important investment implications, for two reasons:

–for many years, Thailand has been a big source of automotive components for Japanese auto firms, as well as a jumping-off point for the assemblers into the rest of Asia.

–Thailand produces a lot mechanical and low-end electronic parts that find their way into computers and consumer electronic devices.

effects on industry

Of the accounts I’ve read, the Financial Times has the best overall summary (I was surprised to find that Nikon makes the majority of its digital cameras in Thailand); Forbes has the most company-by-company information.  Nothing is really comprehensive, though.

Few companies have made public announcements about the effect of the flooding on their operations.  That’s partly, I think, because no one knows for sure, partly because the bigger, publicly listed firms are waiting for their subcontractors, who are the ones directly affected, to say something first.

There are two related issues:

–many roads have been knocked out, so people can’t get to work and parts suppliers can’t deliver shipments. Some areas have no electric power.  It sounds like this situation will last for a couple of weeks, at least.

–no one knows for sure how much damage has been done to factory machinery in the flooded industrial parks.  This could be a really serious problem, especially if machines are heavily customized or built entirely in-house.  The Bangkok Post seems to think that companies had enough warning that they could move machines to upper factory floors, where they would presumably be safe from damage.  But in most cases, it looks like no one has been able to get into the factories to check.

investment implications

Under normal circumstances, Japanese car firms would simply switch to alternate production sources inside Japan.  But those are most likely already running flat out to compensate for capacity lost to the Fukushima disaster.  So the Japanese auto firms will probably face production constraints for some time.  Their third-party component customers will, too.  That’s a mild positive for everyone else.

IT is a little bit trickier, since a lot of Thai companies make components that fly way below the radar.  We do know that Thailand is very important for hard disk drives, however.  And they’re in everything from iPods to set-top boxes to corporate and cloud servers.

If you own a tech stock that seems to be resisting the general uptrend that IT is now experiencing, chances are that if you Google your stock’s name + Thai flooding you’ll see that this is what’s holding the issue back.

What you should do with this knowledge depends on valuation and the extent of your stock’s dependence on Thailand (and your risk preferences, of course).  So you’re on your own.  For the one or two that I own, I think a daily trip to the Bangkok Post website is in order.  That will give the fastest indication, I think, that the flooding problem is not going to get any worse–which will probably be the time to decide whether to own more of the affected stocks.

 

A thought on Toyota’s current troubles

March 16, 2010 By in Autos, Industry Analysis, Japanese development, Stock ideas Tags: , , , Leave a comment

When I began to study the Japanese economy and stock market twenty-five years ago, a brokerage friend of around my age described his generation as having one foot in the samurai era and one foot in the modern world.  His father had bequeathed to him forty cypress trees to use to build a traditional home.  He thought the equivalent gift for his children would be an American college education, which he thought would give them over their Japan-educated peers.

True, that was a long time ago.  And, yes, twenty-and thirty-somethings reject large parts of the traditional Japanese culture.  But, on the other hand, there’s even a kind of nostalgia today in Japan for what might have been, had the black ships of Commodore Perry not arrived in Uraga harbor in 1853, triggering the demise of the Tokugawa shogunate and the restoration of imperial rule as part of a rush to incorporate advanced Western technology into the domestic economy.  In addition, managers in their fifties and sixties still do have a partial anchor in the traditional culture.

There are two important consequences of this cultural tie:

1.  much traditional Japanese discourse serves to communicate that the speaker understands his place in the social order.  Unlike the US, where the lightly regarded social butterfly can secretly be Zorro or Batman, in Japan the senior manager is exactly what his position proclaims him to be–older, wiser, more powerful, a sound decision maker.  The senior does not expect his views will be contradicted by a lower-level employee.  The junior will have a lot of psychological difficulty in conveying such dissonant information;  the senior will have trouble making it sink in that the junior might be right.

This inflexibility is not only an ailment of the pre-WWII zaibatsu conglomerates, like Mitsubishi or Mitsui.  High-level Sony executives, it seems to me, destroyed their first-class video game software business sometime between the PS1 and PS2 generations because the mostly North American game developers weren’t deferential enough.  Sounds crazy, but the two sides were too culturally different.

2.  “Stamp your feet loudly and walk through a wall of iron,” is a famous tenet from a samurai training manual.  It means that a warrior with a pure heart and the right martial spirit can overcome any obstacle, no matter that the laws of physics may say otherwise.  (Another way of putting it might be that any action, no matter how apparently foolish, is a better choice than no action at all.)  tradition invites the manager to think that he can will a part that doesn’t quite come up to specifications to perform as well as if it did.

I’ve seen numerous Japanese firms over the years that I regard as having competent, hard-working, honest managements put out flawed products.  #2 is the best explanation I can come up with for why.  Of course, it doesn’t hurt if information only flows easily in one direction, either.

Of course, Japan is not alone in having management foibles.  For example, where but in the US would a spiritual descendent of P T Barnum be able to Powerpoint his way to become CEO of a huge industrial conglomerate or a major commercial or investment bank, without having much idea of how the operations actually work?  Here such a person might put a cap on his career by becoming Secretary of the Treasury, as well.

Investment implication: Yes, there is one.  In Japan, go for counterculture companies, run by younger people–women, if possible.

a little more on MTLQQ–Motors Liquidation

November 15, 2009 By in Autos, Industry Analysis, pink sheets Tags: , , , , , , Leave a comment

The website is better

I happened to look at the MTLQQ website last Thursday.  It has been expanded considerably since my last visit, some months ago.  The site now has links to thousands of pages of bankruptcy-related documents.  And for nostalgia fans, you can also get past General Motors annual reports.

One section of the bankruptcy filing gives 852 pages of pending lawsuits.

Another lists MTLQQ’s properties, which include the Hyatt Hills golf complex in Clark, New Jersey.  HH has nine holes of regulation golf and a miniature golf layout.  It’s being carried at about $5 million.  How did that get in there?  Why only nine holes?

The most important section lists MTLQQ’s assets, as of the bankruptcy, at $2.1 billion and its liabilities at $27.4 billion–meaning a total company  deficit of $25.3 billion.

Monthly SEC filings

The newest are an 8-K and a copy of the monthly report for September to the bankruptcy court, filed on November 12th.

Excerpts:

MTLQQ had a $100 million loss for the three months ending September.  That’s not so surprising if you read the interview summary below.

Liabilities have expanded to about $35 billion.  The major creditors are unsecured bond holders ($27.3 billion), unions ($3.5 billion) and product liability claims ($1.5 billion).

A Financial Times interview with the CEO

The interview with Al Koch, a liquidation specialist whose firm was hired by the bankruptcy court, has a few salient points:

1.  he’s developing a ten-year plan to dissolve MTLQQ

2.  MTLQQ is still receiving about a thousand new claims a day, which is more than had been expected.  They fall into three main categories–vehicle liability, tax, and environment.

3.  Koch doesn’t expect to net anything from asset sales.  “It’s not so much about how much we’re going to get as about how much we’re going to pay,” since maintaining an idled car plant can cost $3 million a year.

Conclusion

Yes, MTLQQ does own 10% of the “new” GM plus warrants to buy another 15%.  But, even assuming the liabilities don’t expand from here, which they have already shown a tendency to do, the first $35 billion of that is owed to MTLQQ’s creditors.  In other words, for you to make any money from owning MTLQQ, you have to believe that when it eventually relists, the “new” GM will have a market cap as big as IBM or GE.  What are the chances of that?

You can also see my first post, dated September 9, 2009.

Motors Liquidation (MTLQQ.PK): a pink sheet stock

September 9, 2009 By in Autos, Industry Analysis, pink sheets Tags: , , , , , , 2 Comments

Q is for bankrupt

My friend Tom (Hi, Tom!) mentioned this stock to me when he and his wife were visiting a week or so ago.  And, yes, an added Q at the end of a ticker symbol does mean the company in question is in bankruptcy.

What is Motors Liquidation?  As part of its Chapter 11 bankruptcy proceedings, General Motors separated its assets into two piles:  those that it thought were economically viable, and the real junk.  It  transferred the good pile into a new corporate entity that is not (yet) publicly traded, in return for a 10% interest in the new company and warrants to buy 15% more.  It left the junk, plus a lot of liabilities, inside the “old” GM, which was delisted from the New York Stock Exchange and re-tickered as GMGMQ.  The bankruptcy court’s instructions to the GMGMQ managers were  to sell what they could, pay the proceeds to GM creditors and then turn out the lights for good.

What’s inside MTLQQ?

Besides the “new” GM stock, there are a bunch of obsolete plants being taken out of service, a lot of debt, plus legal, environmental, and union claims.  MTLQQ has repeatedly said that creditors are highly unlikely to be paid in full and that, therefore, there will almost certainly be nothing left for MTLQQ shareholders.

SEC filings for MTLQQ aren’t chock full of information, but I tend to believe the MTLQQ management.  It would be hard to believe that in such a high profile and carefully scrutinized bankruptcy–one in which unions and boldholders are going to lose billions of dollars–there would be any value left for common equity holders.  Remember, too, that common shareholders are routinely wiped out in any Chapter 11 filing.

In other words, a lottery ticket has better prospects than MTLQQ.  Lotteries are set up to pay out only a fraction of what the state takes in, but that does mean something to some ticket holders.  MTLQQ is set up to pay zero.

MTLQQ generates lots of trading volume…

Yet, the stock has had average daily trading volume of over 25 million shares through July and August.  This big volume has gone through even after the regulators stopped trading for three days, changed the ticker from the initial designation of GMGMQ, doubled the Qs and issued a public warning that MTLQQ was worthless.  Here’s a link to the SEC statement.

Where is the investor interest coming from?  The SEC cites “confusing, potentially misleading information” disseminated by “rumors in fax or email newsletters, Internet message rooms or on web sites offering online stock tips.”  The Washington Post also cites interest from MIchigan residents who want to support the auto industry and who are unaware of the facts, despite having the GM restructuring going on in their own backyard.

…and trades on the pink sheets

as a “Pink Sheets Limited” stock.

True, the stock is labelled as providing “limited” information to potential investors and the pinksheets website makes it clear the company is in bankruptcy.  And, of course, Enron was an NYSE stock, so a listing pedigree isn’t a foolproof guarantee against fraud.  MTLQQ volume was, I think, produced by a combination of laziness and ignorance as well as  deception.

Nevertheless, information is the lifeblood of investing.  Information is particularly important in the case of small- or medium-sized stocks.  Domestic pink sheet stocks, almost by definition, lack this commodity.  So the mere fact of pink sheet trading should mean that you must be especially vigilant and do your own research before buying.

November 15, 2009

See my update dated today.