Sometimes, the most painful events of our lives are the ones that produce the biggest long-term gains.
That dynamic definitely holds true for the auto industry, where years of declining revenues and sloppy production eventually led some domestic companies into the hands of the Federal Government for a highly controversial bailout at the height of the financial crisis in 2008.
In the face of a broken and outdated model and growing public criticism, the industry was faced with two choices. Either start evolving, and evolving quickly, or go the way of the dinosaur and start looking for a good place to roll over and die.
Only The Strong Survive
The response can be seen from the top to the bottom of the industry, with both domestics and international manufacturers taking drastic measures to regain competitive advantages that had somehow been lost after years of complacency.
Domestic manufacturers like Ford and General Motors began scaling back on production and cutting unprofitable divisions that had been a drag on profits for years. The group is also making a concerted effort to align their growth strategies with social and economic trends that have consumers concerned about the environment and rising gasoline prices.
International players like Toyota and Honda, who smartly avoided the sharp sales declines of the domestics are also in on the game, with Honda further enhancing production efficiencies that allow different designs to share the same components.
Toyota Learns a Tough Lesson
Toyota, which has suffered mightily from its highly publicized recall issues, has been ahead of the curve on the environmental front, with its Prius Hybrid and environmentally friendly production facilities setting industry standards. Its recent brush with the dark side has only made the company more focused on developing better technology and enhancing communication with its customers.
None of these changes came easy, in fact, for some, it was a matter of life or death. And although we have seen considerable progress, there is still plenty of work to be done, with global auto sales remaining below peak levels as consumers struggle with high levels of unemployment and restricted credit.
But eventually, the world economies will heal, and the auto makers will enter the more bullish environment having weathered a very challenging test that forced them to rethink their brands and their approach to the market.
Ultimately, something that has been very painful will produce long-term gains for the industry, here are a few stocks that look well positioned to capitalize.
4 Auto Stocks
Ford, Inc. (F) has been one of the best turnaround stories in the auto industry and the overall economy as well. The company was the only major domestic auto to avoid a government bailout, something that went a long way to reinforce its public relations. The company’s share price has been raging over the last 18 months, jumping from below $1 in late 2008 to a recent high above $14. Ford has an average earnings surprise of 116% over the last four quarters, with a bullish next-year estimate of 18%. Take a look at the chart below.
Toyota Motor Corp. (TM) is no stranger to tough times, recently slugging its way through a crippling PR nightmare that clipped its revenue and pristine public image. Toyota has responded by boosting its investments in R&D and launching big-time dealer incentives to buy back its market share. In the short run, it has been a painful experience for the company, but ultimately, this Zacks #1 rank stock will be better equipped to manage and respond to growing sales down the road. 
Group 1 Automotive, Inc. (GPI) is in a different class than the auto makers as a dealer, but as a small capper with a market cap of $590 million it could have more long-term up-side potential. When the auto makers deliver higher-quality products to the market and garner customer loyalty through more responsive customer service, the dealerships unequivocally gain. Although Group 1’s share price has leveled off after gaining through the first half of 2009, the valuation picture is compelling, with a forward P/E of 10X compared to the industry average of 14X. Take a look at the chart below.
Asbury Group, Inc. (ABG) also works on the dealership side of the business with a market cap of $350 million. This company has also seen big gains over the last year, more than quadrupling in price after bouncing from a low below $2 in July of 2009. Although the company has one small earnings miss two quarters ago, its average earnings surprise over the last four quarters of 41%. The next-year estimate is projecting 21% earnings growth, take a look at the chart below.
Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor in charge of the new Zacks Momentum Trader Service. Zacks Investment Research
