Investing in the Car Market

When considering purchasing a car, affordability is paramount - it's about how comfortably something fits into a budget without causing financial strain. As the saying goes, "If you can't buy something twice, you cannot afford it."

On the other hand, investing has the potential to enhance affordability by growing wealth and generating passive income, particularly in the long term.

Given vehicles' essential role in transportation, the demand for cars tends to remain relatively stable as money circulates in the market. For investors, such a market presents potential short and long-term opportunities driven by factors like vehicle sales, company earnings, and investor sentiment towards future sales.

To put this in perspective, here are a few automotive pioneers that have nearly doubled returns for investors, with some seeing growth of over 800% in five years through long-term investment strategies.

Car Manufacturers 

Toyota Motor Corp, Japan’s largest automobile manufacturer and one of the world's largest automotive companies, has seen its shares grow by 80% in the past 12 months and around 100% over the past 5 years. The company is investing in Electric Vehicles (EVs) and remains committed to hybrid technology as a bridge to full electrification. Additionally, Toyota has a history of paying dividends twice a year and initiating buyback programs to repurchase its own shares.

Toyota's profit forecast for the year was raised thanks to strong sales of hybrid cars. The company sold 951,000 hybrids in the third quarter, a 47% increase year-over-year. This helped total vehicle sales rise 10% as well. According to the Chief Financial Officer, hybrid vehicles sold 3.4mn to 3.5mn units last year. "In 2022, I think it stood at 2.6mn or so. So, within the year, there has been an increase of slightly less than 1mn in demand for hybrids globally. And I think demand is likely to reach 5mn units by around 2025." 

Shares of Ferrari NV, an Italian luxury sports car manufacturer known for limiting production to boost exclusivity, have risen by 52% in the past 12 months and 200% over the past 5 years. The company has been investing in EVs and hybrids and has no intention of introducing self-driving cars. Like Toyota, Ferrari has a history of initiating buyback programs and pays dividends annually.

Ferrari boasted a successful year in 2023. Their net revenue surged 17.2%, fueled by a strategic product mix, increased personalisation options, and higher sales volume and pricing. Global shipments reached 13,663 units, with growth in the Americas and the Rest of the APAC regions. Highlighting their commitment to innovation, Ferrari recently partnered with Philip Morris International to explore new energy technologies for a more sustainable future. The CEO hailed 2023 as a record-breaking year, with net profit surpassing €1 billion for the first time. "We now have a very important year ahead of us in the execution of our business plan, which continues on schedule along its carefully planned path."

Tesla, the poster child of the electric vehicle revolution, has been down 4% in the past 12 months but has been up more than 800% over the past five years, reflecting investor confidence in the company's long-term prospects.

In the first quarter, Tesla produced over 433,000 vehicles and delivered about 387,000. Additionally, 4,053 MWh of energy storage products were deployed, marking a quarterly record. Lower volumes were attributed to early production ramp-up of the updated Model 3 in Fremont, factory disruptions from the Red Sea conflict, and a Gigafactory Berlin arson attack. Tesla has introduced self-driving cars and is reportedly working on a cheaper EV model. Recently, the CEO denied allegations that the company had scrapped the plan to make more affordable EVs, commenting on a social media post saying, "Reuters is lying." Tesla's Q1 2024 financial results will be released after market close on April 23, 2024.

In terms of dividends and share buybacks, Tesla hasn’t paid dividends recently or initiated any buyback programs.

Pre-owned cars

It’s not just car manufacturers benefiting from the automotive and transport market's circulation of money. In South Africa, for instance, the used car market has experienced strong demand for pre-owned cars due to inflationary pressures on consumers. To capitalise on this demand, South Africa’s largest pre-owned vehicle trading company, WeBuyCars, recently unbundled and listed on the JSE, with intentions to increase its monthly volume of traded cars by around 60% in the next 4 to 5 years. WBC also plans to pay dividends at least twice a year. 

According to Group1 Cars, "The South African used cars market is gearing up for a promising year in 2024. With robust demand expected to persist, projections indicate an increase in transactions compared to the previous year." Toyota led with a 16.4% market share in South Africa, followed closely by Volkswagen and Ford. BMW and Mercedes-Benz completed the top five brands, all available on EasyEquities.

Conclusion 

In conclusion, while the success stories of companies like Toyota, Ferrari, and Tesla highlight the potential for significant long-term returns, it's crucial to recognise that past performance does not guarantee future results. Like any investment field, the automotive sector comes with its own risks, including market volatility, regulatory changes, technological disruptions, and geopolitical factors.

Moreover, factors such as consumer demand, investor sentiment, and interest rates can significantly influence future performance. Despite these challenges, the emergence of volatility can also provide entry points for new investors, offering opportunities to capitalise on market fluctuations.

EasyEquities' fractional shares allow individuals to engage with the market, making it accessible for everyone to invest in the growth of the automobile industry and beyond, regardless of the investment size. As demonstrated by the over R119 million in dividends distributed in the first quarter of 2024 from a diverse range of dividend-paying stocks which could offer additional avenues for potential returns.

Therefore, diversifying one's investment portfolio across various industries and markets is a prudent strategy that could mitigate risks and maximise potential returns. Spending time in the market, rather than timing the market, could lead to greater returns, supporting the adage, "Time is money."