Does the Auto Sector Have Any Speed Bumps?

by Jim Woods | September 10, 2013 1:20 pm

Record sales in August, but stalling Europe might slow the party.

If you’ve been keeping up with the news from the auto sector over the past year, you’ve probably noticed that we’ve been driving on a smooth road.

Just last week, overall sales for the sector in August drove to an annual rate (after seasonal adjustments) of 16.09 million vehicles, according to industry trade group Autodata[1]. That number is up from a seasonally adjusted 14.49 million one year ago. More importantly, this was the first time automakers have surpassed the 16 million vehicle level since the pre-recession days in late 2007.

Leading the way higher on the sales front were American stalwarts Ford Motor (F[2]),  General Motors (GM[3]), and Fiat’s (FIATY[4]) Chrysler, all of which reported robust double-digit percentage sales jumps in August. The big Japanese automakers also posted outstanding results in August, with Honda (HMC[5]), Toyota (TM[6]) and Nissan (NSANY[7]) all coming in with strong year-over-year monthly sales figures.

The positives for the auto sector can be seen in the numbers, and there is no doubt that more car buyers are embracing new vehicles now than at any time since the Great Recession began. There’s a confluence of reasons why it makes sense to buy a new car right now, and I outlined many of those reasons in my recent article, “Who Wins in the ‘Golden Era’ of Car Ownership[8]?”

The key takeaway is that there has never been a better time to own and operate a car based on several key factors such as durability, fuel efficiency, safety, low financing costs and overall affordability. Consumers know this, hence the outstanding sales — and the concomitant rise in the stock price of Ford, GM, Toyota and others over the past year.

So, are there any speed bumps out there that could slow the sector down going forward? The answer is yes, and most of them are in Europe.

According to a recent report from Moody’s Investor Service, four major European auto sellers are poised to lose a combined five billion euros ($6.6 billion) in the region in 2013[9]. Moody’s cited falling demand — at its lowest level in two decades — as the chief reason for the expected weakness in the region.

The four European car sellers are Fiat Chrysler, Ford Europe, GM Europe, and Peugeot-Citroën. All four are likely to feel the European pinch, and that could put the brakes on their respective bottom-line growth. And, unfortunately for automakers, next year doesn’t look much better in terms of a rebound in Europe.

In a conference call following the release of the Moody’s report, analyst Falk Frey said, “We do not see any indication of a sustainable, upward trend in demand from 2014 onwards.” Frey added, “The question will be what happens to those companies and how long can they contain their cash burn with their available liquidity.”

While the European headwinds are a concern, I think they are much more of a concern for Europe-centric companies such as Peugeot-Citroën. Ford, GM and Fiat via its Chrysler brand remain stalwart performers in the U.S., and relatively new markets such as China are expected to help boost bottom lines going forward as well.

Now, while Europe certainly is the biggest speed bump, there are other smaller obstacles facing the auto industry. The average cost of a new vehicle reached a record high of $31,252 in August, according to TrueCar.com. That figure is up more than 3% since last year.

Also, young people aren’t as enthusiastic about cars as they’ve been in the past, and some think it is because Millennials prefer to stare at their smartphones[10] and jump on Facebook (FB[11]) rather than hit the open road.

Yet despite a European slowdown, higher new car prices and a general lack of enthusiasm for automobiles by the younger generation, car sales remain at record levels.

Until that bottom-line figure starts to falter, look for automakers and their stocks to continue running right over these aforementioned speed bumps.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2013/09/does-the-auto-sector-have-any-speed-bumps/

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