The Quiet Comeback of the U.S. Auto Industry

Four years ago, the U.S. auto industry was on its deathbed.

General Motors (NYSE: GM) and Chrysler were forced into Chapter 11 bankruptcy protection amid rapidly declining sales in the face of the worst financial crisis since the Great Depression. Detroit was chastised for churning out bad cars, prompting U.S. consumers to buy vehicles made by foreign automakers like never before.

Put simply, the U.S. auto industry was on the brink of complete collapse.

Enter Barack Obama.

In 2009, the newly minted president signed off on an $80 billion bailout package that saved the once-proud American auto industry from going belly up.

Today, of course, we can debate the merits of President Obama’s auto bailout, particularly now that the U.S. Treasury estimates that the recovery package will cost taxpayers $3.4 billion more than previously thought. That revelation has certainly been good fodder for Mitt Romney as he campaigns to supplant Obama in the White House this November.

Politics aside, it seems now that the U.S. auto industry was worth being rescued.

August sales at the Big Three significantly outpaced expectations. Chrysler’s sales were up 14% from a year ago. Ford’s sales increased 13%. GM’s sales improved by 10%. Each of those sales figures surpassed economists’ estimates.

But it’s not just U.S. automakers that are recovering.

Sales at Honda (NYSE: HMC) and Toyota (NYSE: TM) were up 60% and 20%, respectively, from last August now that Japanese factories are fully stocked again after the March 2011 tsunami and earthquake laid waste to entire regions of the country. Volkswagen, a German automaker, experienced a U.S. sales boom last month, with a 63% year-over-year increase.

As a whole, U.S. auto sales are expected to reach 14.3 million this year – 1.5 million more cars sold than a year ago, and 4 million better than the 10.4 million sold in 2009, a 30-year low.

So far the improved sales have yet to spill into most automakers’ stocks.

Ford shares are down 15% this year and have basically been slashed in half since the beginning of 2011.

GM’s stock has dropped more than 37% since the company went public in late 2010.

Honda shares have barely budged this year. Toyota’s stock is still trading below its early 2010 levels.

All of those stocks are dirt cheap at the moment when compared to earnings. The average P/E ratio among those four stocks is 10.3. Ford shares are trading at just 2.1 times trailing earnings right now. GM shares can be had for 7.6 times earnings.

So there’s plenty of room for improvement – especially if U.S. auto sales continue the way they’ve been going.

The problem, of course, is overseas – especially in Europe.

A $361 million loss in Europe weighed on GM’s earnings last quarter. European losses also dragged down Ford, whose net income fell 57% in the second quarter despite gains in its North American auto unit.

Only Chrysler has managed to avoid being dragged down by weak European sales, even though it’s owned by Italian automaker Fiat.

With Europe’s sovereign debt problems showing no signs of letting up, it might be a while before automakers’ improved U.S. sales translate into sustained earnings growth.

However, with many auto stocks generously priced at the moment, it might be worth taking a flyer on an industry that’s seemingly back from the dead.

Things look pretty grim in Europe right now. But the auto industry has survived worse.