TAKING STOCK: Choose auto parts suppliers over automakers when investing

Dear Mr. Berko:

Lately, you've panned GM and Ford, both which are off by 40 percent. You doubted that sales would be strong in Europe and the U.S. Now that the stock prices are down so far, do you think they'd be good long-term investments at their current prices?

CP, Kankakee, Ill.

Dear CP:

Consider the following problems across the pond ...

* The unfair demand for collateral by some EU countries as a stipulation before lending money to Greece.

* The audacity of China's reluctance to lend Italy $280 billion euros.

* The politically inappropriate recommendation by our Fed that European banks must increase their reserve requirements.

* Union-inspired riots in Spain, Greece and Italy.

* The high unemployment rate and growing economic malaise speeding across Europe.

* The capitulation of Dexia, one of the largest banks on the continent.

* An angry German public who feel betrayed that they must bail out a profligate Greece and possibly Italy, as well as Spain.

So I figured that American auto sales to Europe would not be robust. So far it's true.

And in the U.S., I figured the following problems would snuffle auto sales: high unemployment; crashing personal incomes; record personal debt levels; a mushy real estate market; a volatile and vexing stock market; a continuing decline in the standard of living; municipalities struggling to remain solvent; and growing welfare roles.

I was correct about Europe but wrong about the U.S., so far. In Europe, most men consider an automobile to be a form of transportation. But in the U.S., a car is a living phallic symbol.

U.S. auto sales may be modestly attractive in 2011, and some analysts believe that 2012 will be another good year - especially for profits. Last year, the Ford boys warned that Ford (F-$11.42) would face an extra $1.7 billion in structural and commodity costs. And the anticipated pressure on margins pushed Ford's stock price down by 30 percent.

Well, unanticipated consequences happen on the way to an economic slowdown. The average U.S. lightweight vehicle weighs 3,880 pounds, 2,700 pounds of which is plastic, rubber and fluids. The economic slowdown has toppled commodity prices so that the costs for steel, rubber and other raw materials have fallen about 25 percent per vehicle, which will look pretty darned good on General Motors (GM-$24.16) and Ford's bottom line.

So, in sum, it's not inconceivable that revenues and earnings will show double-digit growth next year. And given the choice, many Americans would rather spend two grand to pimp their rides rather than fix the sewers in their homes.

But I can't recommend the autos. There's something that sticks in my craw, and it's the United Auto Workers Union. In the future, as they have in the past, the UAW will - to the detriment of the industry it represents - do anything in its power to raise the income of its members. And union intransigence in other industries (especially the airlines) is legendary and does not augur well for a long-term investment.

But I will recommend the auto parts suppliers, such as AutoZone (AZO-$332), which had double-digit earnings gains from last year and should grow earning by 15 percent in 2013. Or Advanced Auto Parts (AAP-$67), the earnings of which may improve this year by 18 percent and by 15 percent by 2013. O'Reilly Auto Parts (ORLY-$75) expects to post strong double-digit earnings growth this year and increase 15 percent in 2013. And, finally, Pep Boys (PBY-$11), a few tough guys from Philadelphia, will likely see strong earnings growth of 20 percent next year.

I think Americans will be fixing a lot of cars this year and next, and those Big Four are the biggest and best bets.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Mon, Nov 21, 2011