After six years of record automotive sales, sales are slowing and the streak may end in 2016.
According to research firms Autodata Corp and Ward’s Automotive, total industry vehicle sales in August and September fell compared to year-ago sales for their respective months. This is despite record industry incentive spending in September, according to a J.D. Power research note.
Concerns that vehicle sales peaked has weighed on auto manufacturers’ share prices for some time now, says Pat O’Hare, chief market analyst at Briefing.com, using the top two U.S. automakers, Ford Motor Co. (ticker: F) and General Motors Co. (GM) as an example.
[See: Car Companies and the Race to Profits.]
“(Auto stocks) had a great recovery off financial crisis lows,” he says. “Now the narrative is switching to ‘have auto sales peaked?’ That’s a narrative that’s been seeping into the auto industry not just for the last month or year, but really the last several years. If you look at a chart of Ford and General Motors, coming off the financial crisis lows, they peaked in 2014. They’ve been trending lower ever since.”
Whether vehicle sales notch a seventh straight record year depends on what kind of year-end push the industry makes, says Efraim Levy, senior equity analyst at S&P Global Market Intelligence in New York, but streaks eventually come to an end for everything, even auto sales.
“We had pent-up demand, which has been filled,” Levy says. “There’s a lot of old but still road-worthy vehicles out there.”
When looking at the auto industry from an investment perspective, it includes everything from manufacturers to parts suppliers, and now investors need to decide where to go from here.
Harder times ahead. Levy says given the recent data, vehicle sales have likely peaked. Using Ward’s data, Standard & Poor’s lowered its auto sales estimate to 17.4 million, a 1 percent rise over 2015, down from the previous estimate of 17.6 million. For 2017, S&P forecasts a 1.5 to 2 percent decline in sales.
Goldman Sachs also downgraded the sector to “cautious” from “neutral,” according to news reports.
Levy says vehicle sales of more than 17 million is still high on a historical basis, and sales should be stable, but business will be a little tougher. Discounting may become more prevalent to keep sales up at dealers, which will compress manufacturers’ margins.
“When a rising tide lifts all boats you don’t have to compete as hard for all sales. Now in order to grow, you need to take someone else’s sales,” Levy says.
Manufacturers also face pressure from changing industry dynamics, says O’Hare, such as the rise of car-sharing services like Uber and Lyft. Also, millennials have not bought cars as quickly as other generations.
“I don’t know if (millennial shopping habits) has been an overriding influence right now, but it’s in the back of people’s mind in terms of what will be long-term demand for auto sales,” O’Hare says.
Considering millennials are dealing with the overhang of student debt, it’s not surprising they’ve avoided buying cars. Yet Levy says it’s important to make a distinction between older millennials, who are as old as 35, and younger millennials, who are still in high school.
[See: 8 Great ETFs That Hold ETFs.]
“When you build a family, you need a car to get around. So there’s a point where you can’t avoid it,” Levy says.
Some of the difference is also geographical, he says. Millennials who live in cities not only have access to Uber and Lyft, but most short-term car rental options like Zipcar, which is owned by Avis Budget Group ( CAR), are only available in urban areas, and there’s also public transit, too.
“In the suburbs it’s not convenient to get around,” he says. “In the suburbs you don’t have those options; you need a car still.”
Investors next steps. O’Hare says given Ford and General Motors are down about 33 percent and 25 percent from their 2014 highs, respectively, anyone who still has those stocks are likely in a hold position.
It may not be all bad news for manufacturers, Levy says, as low gasoline prices spurred more sales of light trucks like SUVs over fuel-sipping cars. Automakers get more money for light trucks, and he says, they’ve become more savvy following the financial crisis.
O’Hare says auto stocks don’t hold much appeal, unless the economy starts to accelerate. Yet John Person, president of NationalFutures.com in North Palm Beach, Florida, says he sees truck sales rising as construction is picking up, which is good for automakers. He says if Ford and General Motors continue to weaken into October, they might be worth buying.
“I don’t think the trend will continue to be this weak,” he says.
O’Hare says aside from the manufacturers, investors should look at auto-part retailers like Autozone (AZO) and O’Reilly Automotive (ORLY) with some skepticism.
“They’re trading at all-time highs now and they’re starting to level out. You wonder how much of the good news is priced into stocks in terms of the (broader) market having rebounded,” he says.
The auto sector’s valuations aren’t excessive, O’Hare says, and many of the companies are still making “decent” money, but the industry is cyclical.
With high dividend yields and single-digit price-to-earnings ratios, it allows Ford and General Motors to see some pressure on their margins and still be attractive stocks, but Levy agreed there are skeptics who may want to see how they perform during a down cycle.
O’Hare remains unconvinced.
[Read: The 24-hour News Cycle is Horrific for Investors.]
“It’s not an exciting space right now, I don’t think. It looks to be at an inflection point. Bad news is priced in already, but there’s the potential for more downside if the economy rolls over. People – economists, analysts, investors – are waiting to see if in fact auto sales start to roll over in a more meaningful fashion,” he says.
More from U.S. News
7 of the Most Loathed Stocks in the Market
20 Awesome Dividend Stocks for Guaranteed Income
10 Great Ways to Buy Emerging Markets
Should You Buy Auto Stocks? originally appeared on usnews.com
