Value Choices in the Auto Industry (GM, F, HTZ, CAR, ZIP, AN, KMX, CRMT, ORLY, AZO, PBY)

The month of December was the leading month for new car sales in the US in 2010. It was the second leading month in 2009, and the pattern could continue this year as pent-up demand from buyers boosts sales. Investors, though, have picked a favorite in the industy, and it’s not the automakers themselves. Both General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F) have seen share prices deteriorate in the past month, as have car rental firms Hertz Global Holdings Inc. (NYSE: HTZ), Avis Budget Group Inc. (NYSE: CAR), and Zipcar Inc. (NASDAQ: ZIP). Dealers like AutoNation, Inc. (NYSE: AN), CarMax Inc. (NYSE: KMX), and America’s Car-Mart, Inc. (NASDAQ: CRMT) have risen the most, and parts stores like O’Reilly Automotive, Inc. (NASDAQ: ORLY), AutoZone, Inc. (NYSE: AZO), and Pep Boys – Manny, Joe, and Jack (NYSE: PBY) are mixed. There ought to be an opportunity here.

GM and Ford have both had median target prices lowered in the past month, and GM stock is trading down more than -7% today compared to its price on November 9th. GM’s median target price is now $33.00, and at today’s price of $21.28, the potential upside is 55%. Ford’s median target price is $15.00, and at today’s price of $11.04, its implied gain is nearly 36%. Battery fires in the Chevy Volt have weighed on GM shares, and Ford is being weighed down by uncertainty about a successor to its current CEO. Ford did reinstate a $0.05/share dividend recently, which gave the shares a bit of a boost.

If US sales rise as predicted in December, the potential upsides to these two stocks could close quickly. Toyota today lowered its earnings forecast for the fiscal year ending in March by more than 50%, citing supply problems due to the floods in Thailand. If there are buyers out there, GM and Ford could benefit from Toyota’s continuing troubles.

The car rental firms are all trading lower today than they were a month ago, and the implied gains for Hertz, Avis, and Zipcar are all above 80%. It might be best to think of those as signs of further deterioration in share prices and targets rather than any sort of implied upside.

The best performers have been the dealers. AutoNation has burst through its target price, and CarMax and America’s Car-Mart both have had their target prices raised in the past month. CarMax has the highest implied upside of the three, at 11%, while America’s Car-Mart’s potential upside is about 3%. Recent strength among these dealers should continue through this month, and this looks the one sector of the auto-related industry that stands to gain the most.

The parts stores have also performed well, with O’Reilly also busting through its median target price of $80 and posting a new 52-week high today at $81.24. AutoZone posted weak earnings earlier this week, which has pushed the share price down. But the company’s implied upside to a raised target price of $360.00 is about 9%. The Pep Boys have an implied upside of about 45%, based on a target price of $16.00 and current share price of $11.00. The company’s recent weak earnings report could indicate that the target price needs to come down, not that the share price is on its way up.

The search for a value play among these stocks would probably point to either GM or Ford, both of which appear to be undervalued and to be poised on the verge of a very good sales month. While the dealers and the parts stores have performed better recently, these stocks are pretty fully valued now. The implied gains of greater than 80% among the rental car companies is not a hopeful sign.

Paul Ausick