The €uropean



European Auto Makers: the Easy Money Has Been Made.

After the sharp rally of March, the investment case is less obvious.

The European auto sector has soared over the last few weeks. But if in January or February you tried to tell people there were opportunities over there, everyone's eyes glazed over. People looked upon you with pity. There was no future for autos.

Yet, opportunities were there. I wrote an article for the Italian magazine I cooperate with titled "What if the (European) auto sector is a bargain?" on February 14. My sources showed such confidence in the bullish case that I made an attempt to convince some US leading publications to accept an article with a similar bullish bias but they thought I had to be crazy or something: what? The auto sector? Doesn't this guy know there's a depression?

In fact, the sky was very dark and pessimism in full flower: US auto sales were the worst in the history of the country. GM, Chrysler and Ford looked ripe for bankruptcy. In Europe, new registrations plunged. Opel seemed to follow GM's path to disaster. Fiat, Peugeot and Renault had lost 80% of their value from the top, while BMW and Daimler plunged by a more sober 60-70%.

But there is a price for everything. And the auto sector was really cheap by some historical measures. Of course, not if you looked at earnings or dividends. But you do not expect either of them when you speak of a cyclical sector during the worst recession in a lifetime. Instead, the level of price/sales was much more significant: in January and February, it was at an all time low, if you excluded Volkswagen, whose prices skyrocketed in response to the Porsche deal.

For instance Fiat's P/sales historically fluctuated between 0,14 and 0,95, but plunged to 0,11 in February. Peugeot spent much of its life with a p/sales between 0,133 and 0,335, yet in February was at 0,06. BMW used to experience a range of 0,18-0,74 and was at 0,25. Remember: these figures were calculated on depressed revenue. So, if there was any good news - argued my good sources - we could enjoy a relief rally, at least.

Moreover, Italy, Germany and France embarked on scrappage incentives to promote a revival in auto sales, whose success has exceeded most expectations. In March, car registrations in Germany surged by 40%, after a 22% jump in February. Again in March, Italian car sales ended a 14-month slump, reporting a 0.2% increase, while car sales rose 8.1% in France during the same month.

Accordingly, European car makers have been one of the best sector in the stock market, bouncing 20-30% compared to February and much more against the all time low reached over the winter (Renault soared by 100%).

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