Headwinds for Auto Companies

June 30th, 2016 5:26 am | by John Jansen |

Via Bloomberg:
June 30, 2016 — 5:00 AM EDT

Prospects for another record year in U.S. auto sales are diminishing as car buyers already concerned about job and income growth get something new to worry about: Brexit-spooked financial markets.

“There certainly is a higher probability of having a slightly down year than there was a month ago,” Jeff Schuster, an analyst with research firm LMC Automotive, said in an interview. “It’s no longer just a leveling off — it’s a potential contraction in the second half of the year.”

Even before last week’s decision by U.K. voters to leave the European Union, RBC Capital Markets flipped from predicting 2016 would top last year’s record 17.5 million vehicles to expecting a 1 percent drop, while Bank of America Merrill Lynch lopped its estimate by a half-million vehicles. After the vote triggered a two-day global stock market rout — the kind of event that make car buyers less confident about their finances — LMC and consultant AlixPartners said they’re also rethinking forecasts.

“Confidence and wealth effect are immediate impacts,” said Mark Wakefield, a managing director at AlixPartners, which helped guide General Motors through its 2009 bankruptcy. “It’s a downside scenario.”

While analysts estimate that sales rose in June after a decline in May, the real question is whether growth has peaked. The year was already at a critical pivot point as prospects dim for a repeat of 2015, when a slow first half gave way to an ebullient final six months starting in July in which the annual sales rate often exceeded 18 million. One reason for the nervousness: U.S. employers added the fewest jobs in almost six years in May.

“If we don’t see that bump up in July” sales, LMC’s Schuster said, “that’s going to start us down that path of fairly regular misses on a monthly basis.”

Analysts surveyed by Bloomberg on average predict all major automakers except General Motors Co. will show year-over-year gains for June when they report monthly sales on Friday. The projected seasonally adjusted annual selling rate of 17.2 million would exceed the 17 million of June 2015 but trail May’s 17.5 million pace.

Honda Motor Co. is expected to report the biggest sales gain, at 9.4 percent. Kia Motors Corp. and its affiliate Hyundai Motor Co., which scored well in the J.D. Power new-car quality study released this month, are forecast to rise 8.7 percent. Also predicted are increases of 8.9 percent at Fiat Chrysler Automobiles NV and 4.9 percent at Ford Motor Co. GM’s sales may fall 0.7 percent, according to the average of eight analysts.

Alan Batey, GM’s president for North America, said the company is purposely pulling back on low-profit sales to rental fleets and that sales to individuals should rise in the second half as new models like the Chevrolet Malibu and Cadillac XT5 are introduced.
Automaker Shares

To be sure, an annual sales rate above 17 million still represents a robust auto market, which is why GM and Ford have each posted record earnings over the past 18 months. Yet investors have turned away from auto stocks on the possibility that U.S. vehicle sales are at a plateau, profits at a peak and the best times are in the rearview mirror.

Following Brexit, automakers and parts suppliers experienced the biggest intraday declines since last summer amid concern on European production and exposure. GM shares fell 17 percent this year through yesterday, while Ford was down 11 percent. Each dropped more than than 5 percent since the Brexit vote, exceeding the Standard & Poor’s 500’s 2 percent drop.

“Investors were already concerned about U.S. peak demand,” RBC Capital analyst Joseph Spak wrote on June 29, lowering 2016 earnings forecasts for Ford, GM and most major suppliers. “Europe, which had been stronger than expected, is now a leg that has been kicked off the stool.”

Consumers may stay on the sidelines until the highly charged and unpredictable U.S. presidential election plays out. Stump-speech rhetoric — specifically presumptive Republican nominee Donald Trump’s plan to wall off North American free-trade partner Mexico — is already having a chilling effect on consumer confidence, said Kyle Handley, assistant professor of business economics and public policy at the University of Michigan.

“You don’t actually have to change trade policies to have some real effect on economic activity right now,” Handley said. “If Trump is actually elected and these things seem even more likely, they could slow down economic activity and investment quite a lot – whether or not they come to pass.”

There may be one silver lining from Brexit for U.S. auto sales: It decreased the likelihood of the Fed raising interest rates in the near future. Schuster said while the momentary reprieve might be a short-term benefit, there was “nothing really compelling out there to bring a buyer in who wasn’t looking for a vehicle” as automakers show restraint in offering big discounts.

Those who do come into the showroom might end up driving home in a used model. Used-car prices are dropping as 800,000 more models are coming back to market this year than last. Those late-model, lower-priced cars flooding dealer lots are likely to siphon off some new-car sales, Wakefield said.

That’s another big reason he’s beginning to wonder whether U.S. automotive sales actually peaked last year.

“It can’t get that much better than it is now,” Wakefield said. “But a whole bunch of things can get worse.”

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