3 Reasons to Sell GM, Ford, Toyota — and ALL Auto Stocks

by Jeff Reeves | September 19, 2012 7:30 am

There was recently a big stink made about the fact that General Motors (NYSE:GM[1]) wants to get out from under the onus of Uncle Sam’s ownership … and how the Treasury isn’t willing to sell right now since it would set up the government (and taxpayers) to record a big loss.

This, from the WSJ[2]:

“GM executives have grown increasingly frustrated with that ownership, and the stigma of being known as ‘Government Motors.’ Executives have said the U.S.’s shadow is a drag on its reputation and hurts the company’s ability to recruit talent because of pay restrictions. Privately, executives are also irked at the continued curbs on corporate jet use.”

Love that dig about the corporate jets … don’t you?

At any rate, this story made waves recently in part because of the big American International Group (NYSE:AIG[3]) sale that reduced the government’s stake in the infamous insurer to a minority position[4] … and maybe will result in a profit.

But the big reason investors should pay attention to this story isn’t because of the government’s stake or taxpayers trying to make a profit. That’s the least of GM’s worries. No, the bigger issue is that General Motors — and auto stocks in general — are looking pretty ugly right now. That includes Ford (NYSE:F[5]), Toyota (NYSE:TM[6]), Honda (NYSE:HMC[7]) and … well, every major publicly traded auto stock.

Here are three big reasons (well places, really) why:

Europe

Europeans are not buying cars. Period. This was painfully obvious when GM reported a 41% drop in profits and a 5% revenue slide[8] driven by a loss in its European operations. That’s right, GM didn’t make one red cent in Europe. That trend has continued, and is industry-wide. Data most recently shows this via car registrations seeing their biggest decline in six months across the continent[9], indicating softness all around as German demand fell. Leading the way down was Ford, seeing a 29% drop year-over-year. The Brussels-based European Automobile Manufacturers’ Association is forecasting a 17-year low for full-year sales.

China

That big bet on China that luxury stocks, automakers and others have made in the last few years? Well … turns out that the soaring spending there may have hit a ceiling. Consider that for the full-year 2011, China auto sales growth trailed the U.S. for the first time in at least 14 years[10] at just 2.5%. Total vehicle sales were up year-over-year by just 8%[11] in July, and momentum continues to slow. Plus, throw in a very public trade spat in an election year, and the U.S. challenging China on improper auto parts subsidies, and it could mean very bad things for the Chinese auto business in the next year. As a result Moody’s (NYSE:MCO[12]) just lowered its growth forecast for the auto industry in China[13] (and, by the way, on Europe too).

America

The average age of cars and light trucks on the road is now double what it was in 1970 — a stunning 11 years. That is partially due to the great technology of modern vehicles, allowing them to easily top 100,000 miles, but it’s also reflective of the consumer spending habits that are keeping folks from making big-ticket purchases. Auto sales have been slowly on the mend since the Great Recession but are hardly back to peak levels. In short: While automakers avoided bankruptcy and have managed to pare down costs, it’s not the same as having a booming auto sales environment like we saw in the mid-200s.

The Bottom Line

It all adds up to any ugly outlook for auto stocks. If the slowdown in China is real, the recession in Europe is cutting sales and the American auto buyer isn’t as willing to spend as he once was … it doesn’t leave a heck of a lot of room for growth.

With easier year-over-year comparisons behind them, auto stocks have struggled — Ford, GM, Toyota, Honda, Nissan (PINK:NSANY[14]) and Fiat (PINK:FIATY[15]) are all in the red year-to-date while the S&P has tacked on over 14%. In the case of Fiat, Nissan and Ford, the stocks are actually down double-digits.

Not good, and not sign of an auto “recovery.”

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[16] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  2. from the WSJ: http://online.wsj.com/article/SB10000872396390443995604578000754035510658.html
  3. AIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=AIG
  4. reduced the government’s stake in the infamous insurer to a minority position: http://investorplace.com/2012/09/should-you-buy-aig-as-uncle-sam-sells/
  5. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  6. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM
  7. HMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HMC
  8. a 41% drop in profits and a 5% revenue slide: http://investorplace.com/2012/08/general-motors-lower-q2-profit-tops-forecasts/
  9. their biggest decline in six months across the continent: http://www.bloomberg.com/news/2012-09-18/europe-august-auto-sales-drop-as-german-demand-weakens.html
  10. China auto sales growth trailed the U.S. for the first time in at least 14 years: http://www.bloomberg.com/news/2012-01-12/china-s-auto-sales-growth-trails-u-s-for-first-time-in-at-least-14-years.html
  11. just 8%: http://www.chinausfocus.com/u-s-news/chinas-auto-sales-growth-slows-amid-weak-economy/
  12. MCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCO
  13. just lowered its growth forecast for the auto industry in China: http://www.marketwatch.com/story/moodys-lowers-2013-growth-forecast-for-auto-sales-2012-09-17
  14. NSANY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSANY
  15. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  16. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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