Editor’s Note: Michael Robinson has been following the auto sector since 1980 when he was a young analyst living in Detroit. But he’s never seen anything like what’s happening now.
It’s a perfect profit storm of two exploding industries – auto and technology – that’s creating massive moneymaking opportunities for investors.
To show you exactly what’s happening, and how to play this boom – Michael sat down with Money Map Press Executive Editor Bill Patalon for an incisive question-and-answer session.
He also reveals one stock that could be an easy double. You’ll find the full transcript below.
William Patalon III (Q): Michael, in our talks we’ve shared the fact that we both like the U.S. auto sector’s prospects. Before we get into the international story, take a minute to review just why it is you like the U.S. auto sector… the catalysts, the technology, and the outlook in just this country.
Michael (A): Well, I broke into the finance world as a young analyst in Detroit. I talked with all the major players in the U.S. and Europe, visited auto plants and parts firms. So I have a very good understanding of this industry… and I can tell you: This is the most exciting time I’ve ever seen in the industry since I began tracking it 34 years ago.
Cars today have become high tech. They are brimming with advanced technology.
A wide range of exciting new tech features – everything from advanced sensors to software to GPS to Web and Bluetooth integration – are helping the auto industry rack up new sales records.
With the average age of cars in the United States today at 11.4 years old, I expect new car sales to be strong for the next two to five years. Yes, in terms of reliability, many used cars and light-duty trucks can last well beyond 200,000 miles.
But from a technology standpoint, cars over a decade old are ancient, meaning we are poised for an auto technology “refresh” cycle.
In fact, in January, sales were the highest for that month since 2007.
Patalon (Q): So just how much of this positive outlook is due to the potential for overseas sales? How important is China? What kind of numbers are we talking about? What are the catalysts driving the China market?
Michael (A): China is a nation in the midst of a massive transformation based on several interlocking factors. First, of course, is the long-term move from communism to private enterprise.
That alone is greatly raising incomes and standards of living. Meantime, the government wants to move away from an emphasis on state-sponsored infrastructure spending to a system that relies more on open markets.
And the third big catalyst is the shift away from the provinces to the big cities. Beijing is in the midst of a high-rise construction boom. A video of a 30-story hotel that went up in 15 days in late 2011 has received 5.7 million hits on YouTube.
With 1.3 billion people, China needs a lot of cars, and a rising standard of living in urban centers is boosting demand for new vehicles.
The China Association of Automobile Manufacturers says auto sales rose 15.7% last year to 17.9 million vehicles. That’s roughly two million more than we had last year here in the U.S.
The industry in China today accounts for 30 million jobs. Most of the major nameplates in the U.S. and Europe either sell cars there directly or have Chinese joint ventures, or both. Tesla Motors Inc. (Nasdaq: TSLA) just announced it plans to open stores in 10 to 12 Chinese cities this year and is forecasting that sales there will account for a third of the company’s global growth for 2014.
Patalon (Q): Paint a picture of the China auto market … who are the key domestic players … who are the successful foreign players? How sophisticated are the domestic players… in terms of styling? In terms of marketing?
Michael (A): Ford is tearing up the market there. The company posted huge sales gains in China – up nearly 50% to a record 935,813 units, which was good enough to pass Toyota and Honda, both of which are strong in that market.
GM and VW also are big sellers in China. Some major local names are Beijing Hyundai Motor Company, Dongfeng Peugeot Citroen Automobile Company Ltd., Geely Holding Group, and Chery Automobile Co. Ltd.
Styling there may not be what U.S. buyers are looking for, but it’s first rate. You have to remember that the Chinese are linked to all the major auto makers and have access to design, styling, and engineering.
The Chinese view their domestic industry as a major growth sector and want to see more auto exports, even to the U.S. That means styling, safety, and reliability will have to meet higher global standards.
Patalon (Q): We’ve talked, at length, about how the emergence of high technology in the global auto sector. How key will that be in China, given that the technological infrastructure isn’t as advanced in that market?
Michael (A): One thing about China is that it is a mobile society in terms of tech. By that I mean the population is embracing smartphones and tablets en masse, particularly in the major urban areas.
In that regard, I think what we call the connected car will eventually play a big role in China’s auto market and will help spur sales for the next phase of the industry’s expansion.
It’s just now getting started. Airbiquity Inc., a leader in connected vehicle services, said about three weeks ago that it is partnering with Baidu, the big Chinese internet services firm. The partners intend to begin providing connected car internet services to the Chinese auto market in the next few months.
Patalon (Q): What sectors do you see as being beneficiaries of the China auto boom? Materials? Sensors? Semis? Auto components? Any specific beneficiaries you can identify?
Michael (A): Really, it’s across the entire tech ecosystem, just as it is here in the U.S. So, chips, sensors, materials, really anything you would associate with a car made in Europe, Japan, or the U.S. applies to China but is maybe about five years or so behind us.
Patalon (Q): Let’s handicap some of the players… Which U.S. players do you believe can be winners? Among the automakers? Support players/suppliers?
Michael (A): Among makers, I think both GM and Ford can do well there, but Ford is the bigger of the two right now. Honestly, I don’t expect that to change much. Ford has done a great job of using tech as a sales hook, and that can only help in China, an increasingly tech-focused nation.
With suppliers, I think Delphi Automotive PLC (NYSE: DLPH) will do well there. For instance, it makes body control panels that feature remote keyless entry and alarms as well as digital displays that improve driver awareness.
It has some sophisticated safety devices like adaptive cruise control, lane departure warnings systems, and front and rear cameras integrated with collision avoidance radar. All that will come to China over the next few years.
Keep an eye on Harman International Industries Inc. (NYSE:HAR). It sells sophisticated audio components and systems to most of the world’s major car makers, including BMW, GM, Subaru, Toyota, and Volvo.
Harman also is a play on the connected car, with some 25 million vehicles on the road today featuring its audio-infotainment systems that also integrates GPS and navigation, which the Chinese will soon demand.
Patalon (Q): We’ve talked a lot about China’s e-commerce market. Are we going to see e-commerce play a role in China’s auto market? If so, who will benefit?
Michael (A): Actually, there is one firm in particular that is going to do very well and has already racked up a pretty impressive performance.
Bitauto Holdings Ltd. (NYSE:BITA) is a leading e-commerce player focused on the auto market. It does online advertising and provides reviews and pricing info for consumers.
It also serves as an online showroom for both new and used car dealers. Bitauto even helps dealers with digital ad campaigns as well as setting up and maintaining websites.
In other words, it’s got a seat at both sides of the table – buyers and sellers – with a very high-margin business model. It has operating margins of more than 16%, and a return on stockholders’ equity of 20%. And get this: the most recently quarterly earnings were up more than 120%.
Plus, this is a great time to buy. The stock recently sold off on concerns about growth in China and other emerging markets. But it looks to be close to resuming its uptrend.
With a market cap of $1.5 billion, it trades at about $31 with a forward PE of 24, or roughly in line with the Russell 2000 index of small caps.
Talk about a growth machine. It has a three-year sales growth rate of 54% and has grown earnings per share in excess of 60% over the past three years.
If it just had half that earnings growth, profits per share would double in less than three years. In fact, I think the stock could double well before that if everything plays out the way I believe it will.
At this point, this is by far the best auto e-commerce play in China. And that great thing about it is, no matter which nameplates ultimately prevail in what is a huge market, Bitauto stands to gain — and so do its shareholders.