Readers of my column know that I like companies that provide products that are woven into the human experience. That is, humans pretty much cannot live without them. I certainly feel that way about energy.
It might seem that cars would fall into this category, and yet, they really don’t. That’s why I will not buy Ford Motor Company (NYSE:F) and probably not any vehicle maker stock.
Risks in Owning Automobile Stocks
I like products that require repeat purchases. You need to repeatedly fill up your tank with gasoline, which is one reason I like energy, but that tank is attached to a car that has an average lifespan of eight years or 150,000 miles. Sure, it’s expensive as far as purchases go, but every eight years?
The other problem I have with auto stocks is that there’s tons of competition, whereas the big E&P energy companies are more of an oligarchy. Not only are there multiple manufacturers, but multiple models in any given class of auto. And they have to fight for margins.
Yet another problem is that the U.S. consumer has too much debt outstanding, and default rates are rising. Also cars are a cyclical business. Sales depend on many factors, including overall economic growth. Even though the economy is doing well, car sales are so-so.
January sales numbers for Ford were horrible. Retail sales fell 23%. Truck sales, which often do quite well, fell 1%. Meanwhile, the long-term chart on all car sales is getting pretty toppy.
The entire auto market is not healthy, and it should be, given the economy. Sure, the car market is not in catastrophic mode, but it isn’t humming, either. Car sales fell 10.8% year-over-year. Midsize cars fell 12.6%, and small cars fell 13%. Minivans fell 2%, small vans fell 3%, and midsize and large SUVs fell 1.9% and 1.5% respectively.
Trucks and light vans are doing okay. Light truck sales rose 8%, with pickup trucks up 5% and cross-overs up 13.6%. Large vans rose 5.6%.
What Credit Tells Us About F
So I mentioned that the consumer in America carries too much debt. The NY Federal Reserve’s Q3 of 2017 data trends are pretty alarming.
We want to see people with good credit buying cars in increasing numbers. And we want to see people with mediocre to subprime credit remaining stable or declining. Good credit buyers, with scores exceeding 720, have been flat but stable.
However, we have seen a tripling of lending for those in the 660-719 range, from $10 billion in 2010 to more than $30 billion in Q3. It’s almost as bad in the subprime group of 620-659 FICO scores, where lending grew from about $9 billion to $20 billion. Even worse are those below 620, where lending has more than doubled from $14 billion to $30 billion.
That alone is not good news. What we don’t want to see on top of this are increasing delinquencies, and that’s exactly what is happening. Auto loan delinquencies have increased from 3% to 4.5%.
Accounts that are transitioning into delinquency popped from about 7% to 7.7% since 2012. The transition into serious delinquencies (90 days plus overdue) increased from 1.7% to 2.3%.
This is the sort of analysis that most investors don’t look at and don’t care about, but they should. It’s the sort of analysis I do in my stock advisory newsletter, The Liberty Portfolio. It’s this analysis that tells me that the auto market is not healthy above and beyond the lower sales.
As the credit quality of borrowers gets worse, we see delinquencies and defaults increase. Like its peer, General Motors Company (NYSE:GM), Ford makes a good deal of revenue from its auto-financing business. Need a car? You can get financed when you buy it!
But every default on principal means that all the money F makes from interest on about 12 other performing loans, gets offset by the principal it loses on bad loans. So there’s that.
As defaults increase, demand for all cars will decline. For subprime borrowers, they are probably buying used cars. Less demand means prices fall. If prices fall, margins get squeezed. Then new car buyers see the great deals on used cars and abandon the new car market, reducing demand and profits for new cars.
Bottom Line on F Stock
There are just too many problems in the U.S. automobile market for me to get anywhere near F stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at [email protected].