As the North American International Auto Show gets underway in Detroit, automakers are riding high, having ended 2015 with the highest sales ever recorded. The final tally for the year, according to WardsAuto, reached 17.47 million vehicles, a 5.8 percent increase from the 16.51 units sold in 2014.
Yet while 2015 saw big gains in sales, the same can’t be said for auto stocks. Toyota Motor Corp. (ticker: TM), General Motors Co. (GM) and Ford Motor Co. (F) each saw their share prices decline last year, following an overall trend in lower stock prices that pushed the Standard & Poor’s 500 index down nearly 1 percent.
With another year of robust sales forecast in 2016, can Toyota, GM and Ford buck the market’s current down trend and end the year higher? Fiat Chrysler Automobiles (FCAU) and Honda Motor (HMC) show that it’s possible. Shares in those companies rose 20.8 percent and 8.2 percent, respectively, in 2015, despite the broader market’s downward push.
Another record sales year could be just thing to boost auto stocks higher in 2016, says Karl Brauer, senior analyst with Kelly Blue Book. Lower fuel prices and rising employment and personal income portend good things for auto manufacturers. “They’re all doing well,” Brauer says. “There isn’t an automaker on the planet that isn’t making money — except Tesla (TSLA), which hasn’t made a penny in 12 years.”
Demand for autos remains high. Several factors have worked in automakers’ favor, including pent-up demand for new cars that followed several years when consumers held off on big purchases until the economy improved. “People learned that you don’t have to get a new car just to get a new car,” Brauer says. Many Americans are driving their cars longer, and the result is that many of those vehicles are simply worn out and must be replaced.
Also, the pain caused by the Great Recession (including bankruptcies for both GM and Chrysler) forced automakers to overhaul their businesses. Most can now make money when annual industry sales slump to as little 10 million units, about the level to which demand dropped in 2009 at the height of the Great Recession.
The reviving economy brings with it “a slight headwind” in the form of higher interest rates, coming on the heels of the Federal Reserve’s bump in a key overnight lending rate last month, industry analysis from IHS Automotive shows.
Still, IHS estimates there is “strong upside potential” for automakers as an improved economy and stronger job market pushes the U.S. market to 18 million units during the next two years or so.
TrueCar chief economist Oliver Strauss says annual sales of 18 million units is achievable this year, adding that the Fed’s recent increase in interest rates will have a “negligible impact on auto sales.” TrueCar estimates interest rates would have to reach 3 percent next year before causing year-over-year sales to stagnate.
Additional headwinds for auto stocks. A bigger worry among analysts is the potential for unseen economic turbulence that could put the brakes on rising new car sales. “Unfortunately, any hiccup in the economy does throw the industry into a loop because it’s such a big purchase,” Mark Wakefield, head of the automotive practice at consultants AlixPartners LLP, said in an interview with Bloomberg Television.
Wakefield said he believes the U.S. is in the “eighth or ninth inning” of the current boom in new car sales.
Another factor that could impact sales of new vehicles may be the alternative that many consumers would prefer: used cars. Short supplies during the past four years have pushed prices higher for used vehicles, sometimes resulting in little price difference between new and used versions of the same vehicle.
But used car prices are expected to start skidding this year, as dealers take in more trade-ins for new cars and leases expire. Falling used car prices may push manufacturers to boost incentives on new cars to keep sales momentum going. Such incentives, which include rebates and low interest loans, can pinch profits and take a toll on share prices.
That’s a concern shared by Brauer, who cites Fiat Chrysler’s Jeep division as one brand that’s already resorted to generous incentives to keep vehicles from getting stale on dealers’ lots.
After bottoming in 2009, the auto industry has seen year-over-year growth in sales from 2010 to 2015 — the first six-year string of consecutive growth since 1925, Brauer says.
With organic growth in new car sales expected to ebb, he says, the threat of an incentive war increases. Bigger discounts may bode well for consumers, but only time will tell whether investors will benefit, too.
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Why Wall Street Hopes for a Huge 2016 for Auto Stocks originally appeared on usnews.com
