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General Motors products (Lynne Sladky)
General Motors products (Lynne Sladky)

Behind the numbers

Kicking the tires on GM's stock? The parts inside may be a better idea Add to ...

Forget about that Facebook upstart. Two hot investments in today's markets are ones your granddaddy would have recognized. Both GM and Ford Motor Co. have surged in recent weeks.

You can call this outbreak of auto enthusiasm a bet on a broad economic recovery. You can call it a show of faith in the new management at both companies. The real question, though, is whether you should call it an opportunity. Is it really possible that an industry abandoned by the side of the road just two years ago is now back in high gear? And, if so, should you buy yourself a piece of it?

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Ask the analysts who are drooling over Ford to explain why the company's a buy and they'll rhyme off reasons, beginning with the company's improved balance sheet, fresh products and re-engineered worker agreements. Bulls make a similar case for GM, although the optimism there gets a turbo boost from the iconic auto maker's journey through bankruptcy. That has allowed the company to shed many of its most onerous obligations and emerge as a much leaner manufacturing machine.

Even the grouchiest bear has to acknowledge that Ford and GM are no longer the sad sacks they once were. Over the next few months, their fate hinges on the state of the economy: If it continues to improve, Ford and GM shares will move higher on anticipation of greater things ahead.

It's at this point, though, that things get interesting. Car sales in the crucial U.S. market are still hovering around 12.7 million, far below the 16-million-plus that was common before 2007. Over the long haul, the bullish case for Ford and GM rests on the notion that the recession has temporarily - but just temporarily - depressed demand for vehicles. Thus, goes the theory, purchases should rebound as the economy recovers.

But that rebound isn't as certain as you may think. To see what could happen, look at Japan. Passenger car sales there peaked at more than 5.1 million units in 1990. Twenty years later they have yet to return to that high-water mark and are languishing around the 4.4 million level.

It's easy to blame the Japanese experience on the country's lacklustre economy and aging population. Is North America really that much different, though? Japan's unemployment rate of 5.1 per cent is far below the current levels in Canada and the United States. And in North America, where the first wave of boomers is hitting 65, the grey hair factor looms large as well.

Just as car buyers are getting older, so are cars. The median age of vehicles on the road has been steadily climbing. Dennis DesRosiers of DesRosiers Automotive Consultants found that in 2000, only 28 per cent of cars purchased 15 years earlier were still on the road. In 2007, 43 per cent were.

An aging population that drives its cars longer isn't great news for Ford and GM. Neither is increased competition. To take just one example, Volkswagen is planning to triple its sales in the United States to more than 800,000 cars by 2018. And rest assured that won't be the only challenge for GM and Ford.

Both Ford and GM are pinning their hopes on China and India. Those hopes, though, are far from certainties. Every other auto maker also wants a piece of the emerging markets.

Worldwide, the overall pie isn't expanding - at least not yet. Global auto sales hit their record speed in 2007, when more than 71 million vehicles were sold. They've been sputtering ever since. The Economist magazine figures that less than 66 million cars will change hands this year.

Long-term investors should realize the questions swirling around the industry. While eager buyers may drive up Ford and GM shares over the next few months, both companies still face ferocious competition, uncertain demand and the need to constantly re-invent their product lines.

Rather than betting on an uncertain future, you might want to think about a more certain one. Whatever happens to Ford or GM, whether auto sales increase rapidly or slowly, aging cars are going to need more replacement parts. Shares in Uni-Select Inc. the Quebec-based auto parts distributor, are going for a mere nine times forward earnings and 1.4 times book value. The company just bought FinishMaster Inc., the largest independent distributor of auto paints and coatings in the United States. If GM and Ford do well, so should Uni-Select - but even if the big auto makers stagger, it can still prosper. For investors, that adds up to a vehicle worth checking out.

Follow on Twitter: @IanMcGugan

 

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