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Is The Automobile Sector About To Crash Into An Abyss?

Summary

The automobile sector is considered highly cyclical and producing at near peak levels in recent times.

Fundamentally speaking, General Motors and Ford Motor Company appear unpopular in the investment community with their annualized dividend growth rate (as well as Harley Davidson) being disappointing.

The composition of the Dow Jones Automobiles Index is now technically triggering a "sell indication" on weekly charts, with the recent support line now being broken as at 09 Sept. 2016.

Numerous asymmetric risk/reward prospects exist with a clearly defined exit stop loss for each component of the Dow Jones Automobiles Index (as well as the overall index itself).

Background:

The Dow Jones U.S. Automobiles Index (DJUSAU) comprises four well-known companies: Ford Motor Company (NYSE:F), General Motors (NYSE:GM), Harley Davidson (NYSE:HOG) and Tesla Motors (NASDAQ:TSLA). All of these companies have been subject to much newsworthy discussion in the general media recently, either on the basis of being cyclical stocks that are producing at near peak levels or the recent Tesla car accident.

Context: Why does this opportunity exist? Why is the stock under/overpriced?

In addition to the chatter regarding the cyclical nature of the automobile industry, there is an increasing belief that a recent offer made by Tesla Motors to merge with SolarCity Corp. (NASDAQ:SCTY) will not be approved by Tesla Motors shareholders due to huge financial costs/commitments, which raises further uncertainty in the industry.

From a fundamental perspective [see Table 1], General Motors appears to be viewed as quite unpopular amongst the investing community with an extremely low price-earnings (P/E) ratio, with Ford not far behind.

Table 1: Dow Jones U.S. Automobiles Index Fundamental Analysis

Company Current Stock Price ($) 1 Current P/E 1 Dividend yield (%) 1 Dividend growth (%) (1 yr) 2 EPS ($) 1

EPS growth (%)
(1 yr) 2

Market cap ($) 1
Ford 12.38 5.51 4.85 0.60 2.25 131.40 47.95B
General Motors 30.48 3.90 4.99 1.52 7.82 139.30 47.34B
Harley Davidson 50.57 13.26 2.77 1.40 3.81 -10.90 8.67B
Tesla Motors 194.47 - - 0.00 -8.45 0.00 28.29B

Click to enlarge

1 - Current data obtained from Google at end of day 09 Sept. 2016

2 - Data obtained from Motley Fool (www.fool.com; Earnings/Growth page for each company)

In addition, even though the dividend yields for Ford and General Motors are reasonable, the annualized dividend growth rates for Ford, General Motors and Harley Davidson are quite disappointing. These factors combined, as well as declining earnings per share (EPS) for Tesla and declining EPS growth for Harley Davidson, further support the hypothesis that these companies may be on the decline in the near future as additional pressure is placed on the Dow Jones U.S. Automobiles...


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