Car sales for 2015 were predicted to be strong, perhaps even topping 17 million on the year to lead auto sales — and, subsequently, car stocks — to new highs.
But harsh winter weather to start the year put a damper on some of that bullishness for automakers, and has weighed on car sales predictions. As a result, major car stocks have been mixed.
General Motors Company (GM) and Ford Motor Company (F) have both underperformed the roughly 2% gain for the S&P 500 since Jan. 1 and are barely better than breakeven. At the same time, Honda Motor Co Ltd (ADR) (HMC), Toyota Motor Corp (ADR) (TM) and Fiat Chrysler Automobiles NV (FCAU) are all up by double digits.
So what’s the outlook now, and how should investors play the auto sector amid mixed performance? The key lies in the latest car sales data for April — which indicates trouble could be ahead despite the run-up for names like Ford and GM stock.
April Car Sales Hint at Weakness
It’s worth noting that, seasonally, we are hitting the strongest time for auto sales. Better weather for spring driving and the hope of redesigned models boosting sales across the summer months means that the stakes are quite high right now.
So disappointing April numbers, while not the end of the world, should be taken with concern. Items of new from recent car sales data includes:
- Car Sales Miss the Mark: A seasonally adjusted sales rate of 16.5 million, while strong and up from an adjusted rate of 16.1 million a year ago, missed forecasts of around 16.8 million.
- Used Car Sales Still Strong: Naturally, it’s bad news for automakers if folks are opting for older vehicles on used car lots instead of flashy new models. Some will spin this into the fact that trade-in values are lifted by strong used car demand, but that seems like lipstick on a pig.
Click to Enlarge Reliance on Truck Sales: While automakers have benefited from higher-margin sales such as light trucks, the sale of these vehicles at a moment of comparatively low joblessness and low gas prices seems very difficult to repeat. Look at this chart from the Wall Street Journal and you’ll see that, increasingly, consumers have been moving towards light truck sales for months now — and it’s natural to think that once these purchases are made, this demand will drop off sharply. That’s particularly true for laborers and contractors who delayed vehicle purchases in tough times but have a new “company car” now that an improving economy has supported an upgrade to a new Ford F-150 instead of that 10-year old model with 250,000 miles.
This, taken with the prospect of a rate hike at the Federal Reserve later this year that could drive up car loan interest rates, is not an encouraging sign.
Particularly considering the roaring market for sub-prime auto loans — that is, financing for less-than-ideal borrowers. We got into the housing mess because banks couldn’t say no to potential buyers with damaged credit and a high risk of default … and some analysts have speculated that a new credit bubble has been brewing for some time.
None of this is to say that we can’t see a killer summer for car sales that drives stocks in the auto sector higher.
But given the importance of the next few months and the present of pressures on the industry right now, I would steer clear of automakers for fear of disappointment in U.S. car sales.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.