Why Auto Stocks Are Sinking After Car Sales’ Record Year
Ford, GM fare even worse than the battered market as investors worry that sales can’t get any better than this
Shares of auto makers such as General Motors Co. and Ford Motor Co. began sliding late last year. This year, they have fallen even faster than the battered broader market.
Analysts and investors attribute the declines to worries that rising U.S. interest rates could crimp auto finance and to fears that auto sales may have peaked. They also are concerned that the slowdown in China, the world’s largest car market, may be worse than expected. The result has been a setback for an industry that in the U.S. just enjoyed its best year ever.
Shares in GM, the No. 1 U.S. auto maker by sales, have dropped 11% so far this year. Ford’s stock has fallen 8.8%, and shares in AutoNation Inc., the nation’s largest dealership operator, have slumped 20%.
‘If you take away the extra selling days and the incentives, sales were flat in what is a bellwether month.’
“How much higher than 18 million units can we go?” said Brian Hennessey, a portfolio manager at Alpine Funds, which manages $4 billion. “It’s pretty much a peak number.”
“Everybody was talking about how great the month of December was,” Mr. Jackson said on the sidelines of the North American International Auto Show in Detroit on Monday. “But if you take away the extra selling days and the incentives, sales were flat in what is a bellwether month.”
The auto industry’s seasonally adjusted annual selling pace fell to 17.3 million in December from 18.2 million in November.
Sentiment in the options market has turned sour in recent days, suggesting that traders don’t see the auto makers’ stocks rebounding any time soon. Trading in options to sell Ford or GM stock on Thursday and Friday sharply outpaced trading in options to buy the shares, according to data provider Trade Alert.
Mr. Jackson is warning auto makers, especially those producing luxury cars, to reduce output or face a pricing war that will hurt the industry overall. His latest remarks echo his warning last Wednesday that a bulging inventory of unsold cars is beginning to erode profit margins.
Those comments fueled investors’ concerns that manufacturers will have to turn to deals or discounts to get customers to buy more cars.
Photo: Carlos Osorio/Associated Press
Mr. Stournaras said he prefers shares of auto-parts makers to auto makers. He figures that low gasoline prices could encourage consumers to drive more, in turn prompting a greater need for replacement parts.
Shares of Delphi Automotive PLC, a U.S. auto-parts supplier, have dropped 13% so far this year.
The auto makers insist the outlook is brighter. “The prospects of our company are not yet fully reflected in our stock price,” said GM President Dan Ammann in a panel at the Automotive News World Congress in Detroit on Tuesday.
Ford, expecting to post record 2015 pretax profits, on Tuesday declared a $1 billion supplemental dividend and forecast 2016 profits would be equal to or better than last year’s. “Our performance is allowing us to reward our shareholders,” Ford Chief Executive Mark Fields said in a statement.
Some investors agree, saying the selloff in car makers’ shares has been overdone. Ford traded at 9.1 times the last 12 months of earnings as of Monday’s close, according to FactSet. Its five-year average is 9.5. GM’s price/earnings ratio was 6.3, less than its five-year average of 9.1. AutoNation traded at 11.9 times the past year of earnings versus its five-year average of 18.0.
These investors argue that a monthslong slump in oil prices has fattened consumers’ wallets, and the continued recovery in the labor market has begun to result in slightly higher wages. That, they say, bodes well for continued strength in auto sales.
“All the key metrics that we use to gauge the health of the auto industry are as healthy as they have ever been,” said Amit Kapoor, senior equity analyst at Loomis, Sayles & Co. Mr. Kapoor owns GM shares.
Another reason for optimism, these investors say: Cheap gasoline prices remain a powerful driver for sales of the big cars that are most profitable for car companies.
“The auto makers generally make more money selling big cars, like pickup trucks and SUVs, than they do making sedans,” said Annie Rosen, portfolio manager for Fidelity Select Automotive Portfolio. “When you have low gas prices, like we do today, the average consumer willingness to buy a car that uses more fuel goes up.”
Sales of trucks and sport-utility vehicles helped Ford and GM post record operating profits in North America in the third quarter. Ford is set to report fourth-quarter earnings Jan. 28 and GM is scheduled to post results Feb. 3.
—Gautham Nagesh and Christina Rogers contributed to this article.Write to Saumya Vaishampayan at firstname.lastname@example.org and Jeff Bennett at email@example.com