Avoid Auto Manufacturer Stocks

| April 2, 2008 | 0 Comments

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.

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).

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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