One thing has been made clear in the recent chaos in the energy markets — previously assumed relationships may not necessarily lead to profitable investments.
Take for example the reduction in consumer energy costs. With national gasoline prices at multiyear lows, this should be a boon for automakers. At the very least, cheap gas prices wouldn’t hurt their prospects.
Yet for a great many publicly traded automakers this year, the fundamental tailwind hasn’t panned out as expected in the financial markets.
A quick look at the numbers reveals how little gas prices have affected car stocks. The automakers exchange-traded fund First Trust NASDAQ Global Auto ETF (CARZ) — which has a portfolio of internationally recognized companies — is down 15% year-to-date. While CARZ isn’t exactly a benchmark index due to its extremely shallow volume, some of its key holdings aren’t doing so hot.
General Motors Company (GM) is in the red by 14.6% for the year, whereas its chief rival Toyota Motor Corp (ADR) (TM) isn’t that much better, with a 12% loss YTD. These three entities are heavily lagging the S&P 500 index, which currently stands at -6% YTD.
So why haven’t falling gas prices lifted the stocks of automakers?
First, there is a problem of scale. While national gas prices have dropped a dollar from last summer, the savings are being spent on smaller discretionary items like fast food. It’s a nice bonus, but it certainly won’t fuel a car-buying revolution.
More to the point, the modest benefit is overshadowed by the bears attacking the domestic markets. Wall Street may not directly affect individual Americans, but its actions can certainly wreak havoc on major corporations, and therefore the labor market.
Another explanation is that not all automakers are impacted in the same manner by the present economic dynamics.
A prime example is the Russian automotive industry. Total car sales in Russia collapsed in January 2016 — far more than expected by financial analysts. Being the world’s biggest exporter of energy products, Russia is overleveraged to the whimsical fortunes of the oil markets. In this case, cheap gas prices are an omen of a weakening economy.
This not only affects Russian automakers, but also those companies that export cars to the eastern European giant.
A potential revival in car stocks will need a lot more than reduced gas prices. Unfortunately, the circumstances don’t look very favorable. Here are three automakers that may face deep challenges in 2016.
Car Stocks Not Helped by Gas Prices: Ford Motor Co. (F)
In a sign of the times, Ford Motor Company (F) raised an awkward but necessary issue, asking some members of its European workforce to leave the organization voluntarily. The effort, according to Bloomberg, will save Ford about $200 million annually.
Strategically, this would allow the automaker to concentrate production towards highly demanded models — particularly sport-utility vehicles — at the expense of lower selling models. Theoretically, this should be music to the ears of F stock investors. However, its recent performance in the markets suggests otherwise.
So far in 2016, F stock has been one of the bigger disappointments. On a YTD basis, Ford shares are down 13%, almost identical to the misfortunes of GM. Since hitting a high of around $18 in the final quarter of 2013, F stock has generally traded downwards inside a bearish trend channel.
Over the past five years, F stockholders are underwater by roughly 20%. There’s no getting around how ugly it has been, and cheaper gas prices — though attractive to SUV buyers — won’t fix the problem.
It’s true that Ford is making significant headway in Europe. It’s also true that the European Central Bank is considering more stimulus, and that Wall Street is demanding that ECB president Mario Draghi up the ante.
And what could stimulus mean except a presently poor economic condition? It’s possible that F stockholders see the writing on the wall. Despite Ford’s rising European market share, the underlying region’s long-term health is suspect.
Until management creates a more substantive plan to address these challenges, F stock may suffer from cold feet in the markets.
Car Stocks Not Helped by Gas Prices: Fiat Chrysler Automobiles (FCAU)
No matter what they do, Fiat Chrysler Automobiles NV (FCAU) just can’t seem to put together a winning formula. After spinning off its most prestigious asset — Ferrari N.V. (RACE) — as part of a broadly ambitious plan to capitalize growth in Fiat’s higher-volume car brands, the results have been anything but pleasant. FCAU stock badly missed its earnings per share target for the fourth quarter of fiscal year 2015, coming in at 16 cents euro against a consensus of 33 cents. This was by far the worst performance since FCAU stock’s initial public offering.
Worse yet, there’s no evidence that things will get better quickly.
Some will say technical analysis is a poor predictor of a stock’s trajectory. However, there’s no denying FCAU stock’s utter collapse in the markets, in which it lost around 30% YTD. Company shares simply don’t lose that much value without a severe defect present.
Perhaps the only consolation is that management can sleep with no regrets as to its Ferrari spinoff decision. FCAU stock aside, RACE shares are among the worst hit in the automotive industry, down 19% YTD.
What these statistics confirm is an inability for many automakers to stay profitable despite some positives in revenue trends. For FCAU stock in particular, the company is an industry laggard in terms of operating and net margins.
In addition, the rise in capital expenditures over the years has caused Fiat’s free cash flow to dwindle. If they’re not careful, the decline could obstruct Fiat’s growth strategy.
A lot of factors would need to turn favorable in order for FCAU stockholders to regain confidence. Right now, however, the only good news is gas prices — and that’s just not good enough.
Car Stocks Not Helped by Gas Prices: Honda Motor Co LTD (HMC)
By most measures, Honda Motor Co Ltd (ADR) (HMC) should be a standout performer. Honda has an excellent reputation for quality and reliability, and it continues to seek new inroads to further expand its business.
Late last week, Honda announced that it would begin manufacturing hybrid vehicles in China. This is easily a win-win situation. China has a terrible reputation for air pollution that is only getting worse, and “homegrown” hybrids should improve air quality and at reduced overhead costs. However, HMC stock only saw a modest lift after the news release, and sentiment is overwhelmingly bearish.
With a YTD loss of 18%, HMC stock lags behind several of its primary competitors. To add insult to injury, HMC stock also lags the volatile Japanese stock market index Nikkei 225.
The manner and speed in which Honda shares collapsed is especially disconcerting. Down days for HMC stock outnumber up days by a ratio of two-to-one so far this year. This has placed shares well below established technical support lines, meaning it would take a mountain of buying activity to bring HMC stock back up to long-term averages.
But this might be challenge too steep for Honda. Along with pressured margins affecting most automakers, HMC stockholders also have to contend with Japan’s fragile economy, which contracted yet again in the most recent reporting quarter.
Most relevant to the island nation’s exporters, however, is the wild fluctuations in the Japanese Yen index. The currency jumped 6% in February, a remarkable move considering the minutiae of money markets. Needless to say, these fundamental shifts overshadow what little relative benefit results from cheap gas prices.
Of the automakers on this list, Honda may be in the deepest pit, with both domestic and industry-wide pressures putting fear into HMC stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
