Those are pretty nice returns considering that a mere four years ago, General Motors was filing for bankruptcy, and Ford was in the midst of a full-scale restructuring using its own $23.5 billion loan. You don't have to be a calculus whiz or a rocket scientist to understand why America's two largest automakers are having success: Volume and prices are up, while costs are down. Let's take a look at those factors, and what we can expect from these two investments down the road.
Prices are up
As you can see below, transaction prices hit a minor speed bump during the recession but have rapidly increased since.
Right now, vehicle infotainment and wireless technology, such as MyFord Touch and Chevy MyLink, are driving transaction prices higher as used vehicles often lack these new systems. One of the biggest reasons for the increase is that Ford and GM weren't profitable before the recession and were forced to close plants and cut production drastically. It's estimated that Detroit automakers can now break even at Seasonally Adjusted Annual Rate sales levels of 10.5 million-11 million, a huge difference from being unprofitable at SAAR levels of 17 million. That difference in production and profitablilty equates to a much smaller supply of vehicles in the market, and continually increasing demand supports higher prices.
Speaking of rising demand, here's a look at SAAR figures in the U.S. market.
Volume is up
As you can see, vehicle sales have consistently improved since the depths of the Great Recession. The good news is that we have plenty of pent-up demand to work through; consider that the average age of vehicles on the road is still at a record high of 11.4 years. Also, consider that when vehicles reach 13 years of age, the rate at which owners completely scrap their cars rises dramatically, according to Citigroup economist Itay Michaeli.
"No later than 2015, we should see an incredibly strong scrap recovery in this cycle, and it hasn't even begun," Michaeli said the 2013 CAR Management Briefing Seminars, according to Automotive News. "In 2014 and 2015, the rate of vehicle designs and refreshes with tremendous new technology is going to come right at the time when we think the vehicle age will start to hit that ideal range when scrap rates tend to balloon."
It looks like a perfect storm is approaching as demand and scrap rates increase, which support high prices and profits. But that's only one part of the equation; the good news is that production costs are declining as well.
Costs are down
Ford is years ahead of GM in streamlining its operations, and that has shown on the bottom line. Ford's operating margin in North America last quarter was at 10.4% while GM's hovered around 6.2%. One reason is Ford's drive to consolidate its global platforms. Ford's a year ahead of schedule and plans to have 85% of its global sales from nine core platforms by the end of 2013 -- improving economies of scale and reducing cost. GM is also making vast improvements on its U.S. hourly labor cost, which has declined to $5 billion from about $16 billion in 2005, according to Morningstar.
It's easy to see why Ford and GM's stock prices continue to rise: Almost every aspect is improving. The two automakers are producing more valuable vehicles than in years past, are much more financially stable, and continue to improve their profitability. Looking ahead, both Ford and GM plan to break even in Europe and expand in China, and both offer billions of pretax profits that can be reached as soon as 2015. One thing is for sure, while both companies flirt with 52-week highs, the road ahead looks equally bright.
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The article Why Ford and GM Stocks Have Soared originally appeared on Fool.com.Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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