Softer-than-expected auto sales in May accompanied by disappointing economic news caused stocks in the sector to stumble along with the broader market on Wednesday, with Ford (NYSE:F) and General Motors (NYSE:GM) down about 4% and Toyota (NYSE:TM) slipping nearly 2%. While one day’s market news and one month’s sales figures are little more than a snapshot of the sector’s performance, there are good reasons for investors to take a pause and re-evaluate the emerging trends behind those numbers.
Since late last year, auto stocks have been on good run as high hopes for a recovery-fueled revival have boosted investor confidence. Ford posted its highest earnings in a decade last year and has been aggressively repaying debt. General Motors has been paying back bailout funds and last month overtook Toyota as the U.S. auto sales leader. Even Toyota, which spent much of 2009 and 2010 mired in recall struggles, was poised to cash in on rising consumer demand in 2011.
Despite the positive trends of recent months, the May numbers highlight some significant challenges for the industry. U.S. vehicle sales for Japanese automakers fell dramatically in May — Toyota’s sales were 33.4% lower than in May 2010; Honda’s sales were down 22.5% year-over-year.
GM and Ford saw their May sales slip by 1.2% and 0.1% respectively. Only Chrysler posted a sales gain last month, up 10% over May 2010 sales – and that was due to dumping the unpopular Sebring model in favor of mid-sized offerings. One month’s sales performance does not counteract the long-term value of auto stocks. Still, here are four things we learned from Wednesday’s numbers:
- The Economic Recovery Is Softer Than We Thought. Weaker-than-expected economic data on Wednesday sent investors running for cover. The U.S manufacturing sector experienced its largest percentage decline in 27 years in May, its third straight monthly decline after nearly two years of growth. The Institute of Supply Management, which compiles the data, said those numbers indicate a slowdown in the sector that has been driving the nation’s two-year-old economic recovery. Economists used new private-sector payroll data to forecast a much weaker job report when those numbers are released on Friday (http://www.foxbusiness.com/markets/2011/06/01/job-growth-forecasts-revised-downward/).
- Automakers Are Taking A Big Hit From The Japan Crisis. The Japan earthquake, tsunami and nuclear crisis that began on March 11 have wreaked havoc with Japanese vehicle production and the automotive supply chain. A substantial loss of production capability and component parts has created a major inventory challenge for U.S. dealers. IHS Automotive says the Japan disaster has reduced U.S. vehicle inventory by as much as 400,000 vehicles. While dealers commonly keep 60-day inventories, supplies of some fuel-efficient cars like the Chevy Cruze are down to a mere 37-day supply. Even sales of some fuel-efficient small cars not affected by the earthquake are in tight supply. GM said it only has a 37-day supply of the Chevrolet Cruze small car. Hot cars produced in Japan like the Toyota Prius hybrid are down to 10-day supplies and are selling at a premium.
- Lower Incentives Are Affecting Sales Volume. Generous sales incentives kept automakers moving vehicles during the downturn, but most have been slashed by as much as 20% because of the upturn in the economy. That means sales are more profitable, but more aggressive pricing is starting to encounter resistance from potential buyers.
- Gas Prices Are Giving Consumers Pause. All automakers are vulnerable to rising fuel prices and while gas prices may have fallen by about 20 cents in May, they still average $3.78 a gallon, according to AAA. While that may spur consumer interest in electric and hybrid vehicles, short supply and sticker shock is likely to still put a damper on sales.
As of this writing, Susan J. Aluise did not hold a position in any of the stocks mentioned here.
