I’ve never owned stock in Ford Motor Company (NYSE:F), or any auto manufacturer, because they are too sensitive to economic changes. Now there are other crosscurrents as well, and I’m even less likely to own F stock, or General Motors Company (NYSE:GM) for that matter. There’s far too much risk in these auto stocks.
For starters, Ford has a new CEO. He’s shown success as a turnaround artist, whether it be in a furniture company or the University of Michigan’s football program. Still, the new CEO is coming into a difficult situation.
April’s sales numbers for Ford were lousy. Retail sales fell 10.5% and fleet sales went nowhere year-over-year. Truck sales have long been the real moneymakers for F stock, and May sales grew 9.4%, but that was on the tail of a 4.2% decline in April. A volatile sales pattern doesn’t inspire confidence.
That pattern was also evident in fleet sales, which grew 8.4% in May after that flat April. Still, car sales are a mess, falling 21% in April and 10% in May.
Still, when you look at the broader auto market, sales are falling. YoY, car sales, minivan and small vans are sick as dogs. Car sales fell 11% YoY in May, small vans fell 22% and minivans fell 13.6%. This was inevitable, as car sales cratered in the financial crisis, hitting about 9 million sales in 2009, and had since doubled.
There’s another problem that’s been developing for some time, and we have to wait and see how it plays out. The NY Federal Reserve reported May consumer household debt, and the data is disturbing. On page 8 of the report, you can see that the doubling in autos sales was driven by debt. Originations across all credit scores increased dramatically since the financial crisis. Auto loan balances increased by $10 billion, continuing a six-year trend.
On page 12, we can see auto loan delinquencies have started to tick upward, and 30-day-plus transition into delinquencies has been on the rise for some time. The transition into serious delinquencies (90 days plus overdue) has been rising at an even higher rate.
Why is the debt issue of concern? As mentioned, it suggests that people are chewing on debt in order to buy cars. So if they cannot meet debt service, or discover that the price they paid for their car is more than what the market is signaling, they may walk away from the loan and the car to buy a cheaper vehicle. That means F stock, which partially depends on its finance business, could see a wave of defaults.
But there’s one other wrinkle here, and that’s ride-sharing. As more and more people start using carpool services, that means fewer total miles get put on cars, which reduces demand for all cars, especially used cars.
The problem with defaults is that the loss of principal on just one loan wipes out all the income from interest from many loans. That’s why even a few basis points can crater a company that depends on loans. Why might that happen? Look at what J.D. Power Valuation Services says about used car vehicle prices. They have fallen about 12% off their high. This is like an earthquake causing a massive crack in a home’s foundation.
Click to Enlarge If used car pricing falls, then new car owners look at “like new” used cars and are more likely to buy from that segment of the market, suppressing new car purchases.
That includes trucks. As it is, F stock has suffered as international operations have been flailing. Then used car sales continue to drop per ride-sharing, and the bottom falls out of that market.
I have no idea if all of this will come to pass, but the point is that significant risk exists in F stock, GM stock and the auto market in general. I’m staying away.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he does not own any stocks mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
