General Motors Co. is one of the cheapest stocks in the U.S.; Ford Motor Co. is not terribly more expensive. Here in Canada, auto-parts companies Magna International Inc. and Linamar Corp. are among the cheapest TSX stocks that provide decent dividend yields.
Certainly, the auto bailout isn’t too far back in the rear-view mirror, and the automakers are only slowly, very slowly, grinding their way back to their precrash peak sales levels. But is this pessimism justified? Really – what argument, other than the cyclical vicissitudes of the economy, is causing such soggy valuations?
As it turns out, there is an emerging theory that suggests North American auto sales may never again reach past levels. The idea: the younger generation sees smartphones as a substitute for cars, a choice that threatens a decades-long love affair with wheels.
A Bloomberg News article last month surveyed the data: The rate of U.S. auto sales to 18-to-34-year-old buyers declined to 11 per cent in April, down from 17 per cent in April, 2007, according to Southfield, Mich.-based research company R.L. Polk & Co. The University of Michigan Transportation Research Institute notes the percentage of 20-to-24-year-olds with driver’s licences dropped to 81 per cent in 2010, down from 92 per cent in 1983.
Bloomberg quoted Alexander Edwards, an automobile specialist consumer-research firm Strategic Vision Inc. as saying “A car is a symbol of freedom. But unlike previous years, there are many different ways that a Gen Y person can capture that freedom.”
Both Bloomberg and news magazine The Atlantic, in a blog inspired by the report, noted that economic reasons may be reason No. 1 for the problem. Young Americans, even college graduates, are suffering from above-average unemployment, and the graduates are typically saddled with thousands of dollars of debt.
But it’s the comments under The Atlantic’s blog that are most intriguing. Says one reader: “Not a single one of my friends (aged 22-30) enjoys driving and many do not have a car. This is in Los Angeles mind you, not New York or Washington, where large metro systems make a car-free life much easier. The car culture is dead and it's never coming back. Young people want to live in dense, culturally and ethnically diverse, thriving neighbourhoods, not autocentric suburbs with gated communities.”
Or, another: “I’d be the car buyer of twenty years ago … today, I wouldn't take a car if you offered me one for free.”
And a twentysomething with no plans of car ownership: “Once you live a carless life for a while, it's hard to imagine giving up hundreds of dollars a month for something you have proven you don't need and which limits your freedom anyway.”
Dan Luria, a labour economist at Michigan Manufacturing Technology Center, told Bloomberg that these attitudes, coupled with young workers’ lower wages, may cap average U.S. auto sales at about 15 million annually versus the 2000 peak of 17.4 million cars and light trucks.
So, how about it? I’ve made some concessions to the futurists in recent weeks, but I’m not going to go this far. I suspect the number of car sales that will disappear, once the younger generation’s wages are back on track, will be numbered in the tens of thousands, not millions.
Why? First, let me remind you that even as the North American economy meanders, dented by high unemployment and sluggish income gains, automobiles sold at their highest rate in three years in August, at an annualized 14.5 million number.
As for the big picture: I think there are limits to urbanization that will still make suburbs and exurbs appealing to millions of people in the vast land mass we call North America; there are only so many people that find mass transit appealing, rather than appalling.
The comments section on theatlantic.com is not a representative sample of young people; my wife, a middle school teacher, says her suburban students are already talking about their plans for driving and owning cars.
And while I love my iPhone, I haven’t figured out a way to instant-message my children to daycare.
So, if you have some skepticism about the “death of the car culture,” we return to our names. General Motors’ forward price-to-earnings ratio is less than seven; its enterprise value, or market capitalization plus net debt, is just over two times its EBITDA, or earnings before interest, taxes, depreciation and amortization. That combination puts it among the two dozen cheapest stocks on a major U.S. exchange.
In Canada, there are just 35 stocks with forward P/Es less than 10, enterprise values less than five times EBITDA, and dividend yields above 1.5 per cent; both Magna and Linamar make that list. (Magna: P/E under 9, EV/EBITDA about 4, yield 2.4 per cent; Linamar has similar pricing, but a 1.5 per cent yield.)
All seem poised for recovery when the annual sales figures again remind us that millions of people love the freedom of four wheels.