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U.S. sales outlook gives big boost to auto stocks

GM’s Cadillac CTS.


The prospect of U.S. vehicle sales soaring to record levels has auto stocks in high gear.

Merrill Lynch analyst John Murphy predicted that sales could hit 18 million a year by 2018, a decade after the industry was in such horrible shape that two Detroit auto makers went into bankruptcy protection.

His upbeat outlook for auto sales came with another bullish forecast: Shares of General Motors Co. are set to soar to $56 (U.S.) each, compared with zero when its predecessor General Motors Corp. was granted bankruptcy protection.

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The expectation for 2018 sales helped send shares of GM, Ford Motor Co., Magna International Inc. and other parts makers upward Tuesday, extending recent gains. Shares of electric vehicle maker Tesla Motors topped $100 for the first time. The company went public in 2010 at $17 a share.

"After a near disastrous fate in 2009, it is arguable that the U.S. auto industry is now helping lead the U.S. economic recovery and there is still much more room to go," Mr. Murphy wrote in a research note Tuesday.

The U.S. automotive recovery, driven by pent-up demand and an aging fleet, has the potential to feed on itself and kick the industry into an even higher gear while also giving a bit of a lift to the Canadian economy because many auto makers are operating plants in this country on overtime.

The higher sales level will benefit parts makers and publicly traded dealership groups, Mr. Murphy said, raising his price objective for those companies as well as Ford Motor Co. and GM.

If GM's shares hit Mr. Murphy's $56 target and the federal and Ontario governments sell their stake at that price, they would reap about $7.8-billion from the remaining 140.1 million shares in GM they still hold. Combined with the money GM has already paid back, the two governments would end up receiving more money than the $10.6-billion (Canadian) taxpayers doled out to GM in 2009.

Whether GM's share price hits that level depends mainly on the U.S. market, which hit a trough of 10.4 million in sales in 2009 and is forecast to rise to well above the 15-million-vehicle level this year.

Three key variables underpin the current recovery in U.S. sales and expectations that it will continue through 2020, said industry analyst Dennis DesRosiers, president of DesRosiers Automotive Consultants Inc. His own forecast is slightly less optimistic but still calls for sales to reach 17.5 million by 2018.

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The optimism is buoyed by pent-up demand, usage by consumers and vehicle durability, Mr. DesRosiers said.

Pent-up demand throughout North America is in the tens of millions of vehicles, usage is steady and auto makers are reaching the limits of what they can do to make vehicles last longer, he said.

The industry is looking at potentially the best decade for sales in its history, even though it started out with three years well below the 16 million to 17 million in sales racked up in the first seven years of the previous decade, he noted.

Those years of hefty sales, however, were also years of tens of billions of dollars in losses for the Detroit Three as they offered costly rebates and low-interest loans to keep their plants operating and hang on to market share.

But the crisis led to the shutdown of dozens of plants and the shedding of tens of thousands of jobs and profits for Ford, GM and Chrysler Group LLC at much lower sales levels than the early 2000s.

"The restructuring actions taken by not only GM and Ford, but all auto makers producing in North America have resulted in capacity utilization in the 90 per cent range for the industry on average," Mr. Murphy wrote.

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U.S. light vehicle sales were 14.4 million last year, he noted, but capacity utilization was higher than in 2000 and 2001, when sales topped 17 million vehicles annually.

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