General Motors Company (GM) and Ford Motor Company (F) investors are once again left scratching their heads wondering just what it’s going to take for investors to buy auto stocks. Both companies delivered revenue beats in the second quarter and GM convincingly beat consensus EPS estimates as well.
How did the market reward the stocks?
Since GM reported on July 21, GM stock is down 5.5% and Ford stock is down 13%. And this isn’t simply a case of profit taking because there are no profits to take.
In the past three years, Ford and GM are down 31.5% and 18.9% respectively during one of the strongest bull markets and strongest auto markets in history.
In fact, even though the two auto stocks have been tanking, GM’s revenue climbed 2.5% and its net income spiked 126.3% in the past three years. Ford has a similar story to tell: revenue up 7.25% and earnings up 58.7%. Both Ford stock and GM stock now trade at forward price-to-earnings ratios under 7.
What in the world is the market thinking? Here are three reasons investors hate the auto stocks.
Investors Are Terrified of Tesla
Tesla Motors Inc (TSLA) is one of the most polarizing companies and stocks in the world.
Tesla Motors produced only about 50,000 automobiles last year. GM shipped 9.9 million cars. In other words, Tesla’s output was roughly 0.5% that of GM. Incredibly, the market values Tesla Motors at roughly 70% the market cap size of GM.
While GM is delivering record profits, Tesla Motors is burning through billions of dollars and taking on massive debt loads to scale up its production capacity.
Regardless of whether you believe Elon Musk will build the next global auto juggernaut or you believe he will drive Tesla Motors into the ground with reckless spending, Ford and GM investors are worried about TSLA. They are so worried that they are passing on Ford and GM stock despite historically low valuations and nearly 5% dividend yields.
Are Subprime Auto Loans the New Subprime Mortgages?
If you dig below the surface of the recent record auto sales, you will quickly unearth another possible explanation for why investors are skeptical of GM and Ford. Subprime auto loan asset-backed security (ABS) issuance has been on the rise in 2016.
Yes, these are the same kinds of ABS that were backed by subprime mortgages during the mortgage bubble.
According to Wells Fargo, the percent of subprime auto delinquencies has been steadily rising since 2011. It’s is now near 5%. That’s the highest percentage of delinquencies since 2010.
Just like subprime mortgage-backed securities (MBS) during the mortgage bubble, these ABS are designed to withstand a certain amount of defaults on underlying loans, but that default rate continues to creep up. Auto stock investors are worried that the auto market is primed for a major collapse similar to the housing market collapse in 2008.
Ford and GM Investors Are Once Bitten, Twice Shy
Finally, investors typically don’t forget getting burned by a company in the past. GM stock investors certainly remember that the “old GM” stock went to zero when the company declared Chapter 11 bankruptcy back in 2009. They likely also remember that GM and Chrysler required $80 billion in taxpayer bailouts under the TARP program.
While Ford likes to brag that it didn’t require a bailout, the company’s CEO asked Congress for a $9 billion credit line during the Financial Crisis. Ford stock’s abysmal market performance is probably the biggest factor on investors’ minds. In the past 20 years, the S&P 500 is up 234%. Since August 1, 1996, Ford stock is down 1.4%.
It’s hard to blame investors for not having much faith in two auto stocks with such lackluster track records, no matter how cheap the stocks get.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.