7 Bold Predictions for Auto Stocks in 2019

Here’s what the future holds for auto stocks.

A global slowdown in the auto industry has made 2018 a tough year for auto stocks. Edmunds estimates U.S. auto sales were up only slightly, from 17.2 million in 2017 to 17.3 million in 2018. However, those sales have been heavily boosted by unsustainable fleet sales, which have helped offset falling retail demand. Analysts expect 2019 will be a challenging year for the auto industry, but CFRA analyst Garrett Nelson says it may not be as bad as investors fear. Here’s a look at seven of CFRA’s bold 2019 auto industry predictions.

U.S. auto sales will fall below 17 million.

Nelson says U.S. auto sales will finally drop below the 17 million threshold in 2019 for the first time since 2014. It will be too difficult for the industry to maintain near-record auto sales while facing several challenges, he says, including rising interest rates and slowing U.S. economic growth. Automakers will also have a hard time showing year-over-year earnings growth because 2018 earnings were boosted by corporate tax cuts, he says. On the plus side, falling gasoline prices could help boost high-margin SUV and crossover sales next year. Ford Motor Co. (ticker: F) recently announced it is cutting almost all its sedan models to focus on trucks and SUVs.

Chinese auto sales will slip.

Nelson says a 28-year growth streak in Chinese auto sales will finally come to an end this year thanks in part to the trade war between the U.S. and China. China is the world’s largest auto market, accounting for about 30 percent of global demand. However, Nelson is predicting full-year 2018 sales growth will be negative, and 2019 will be a second consecutive down year for the Chinese market. Nelson says that, barring unforeseen government stimulus or other changes in circumstance, the oversupplied China market will likely remain a drag on global auto sales.

Retailers will lead the auto group.

Auto investors may have a much better 2019 than 2018. Stocks slumped in 2018, but much of the industry’s 2019 difficulties may already be priced into auto stocks. Nelson says auto retailers, such as AutoZone (AZO), Advance Auto Parts (AAP) and O’Reilly Automotive (ORLY), will be top performers in the auto group in 2019. The average age of the U.S. car fleet is a record 11.7 years, and Nelson says U.S. consumers have shown a growing preference for used vehicles over new vehicles. Both trends should support auto retailers in coming years.

The best-selling car will be the Tesla Model 3.

One of Nelson’s boldest predictions is that the Tesla (TSLA) Model 3 will become the best-selling U.S. passenger car on the market by the end of 2019. Tesla sold 56,065 Model 3s in the third quarter of 2018, making the Model 3 the fifth best-selling U.S. passenger car. Nelson says a combination of production efficiency and the introduction of lower-priced versions of the Model 3 will help boost sales volumes in 2019. The Model 3 will need to take down the Toyota Motor Corp. (TM) Camry, the current best-selling U.S. car model.

GM will backtrack on plant closures.

In November, General Motors Co. (GM) announced a plan to shut down three plants in the U.S. and Canada as part of a restructuring plan that involves cutting production of several sedan models and laying off 14,000 employees. The announcement boosted GM stock, but were criticized by President Donald Trump, who immediately threatened to cut federal subsidies for GM if the company goes through with the plant closures. Nelson says GM will ultimately cave to pressures from politicians and unions and preserve at least some of those jobs.

Fiat Chrysler will lead Detroit automakers.

Nelson says Fiat Chrysler Automobiles (FCAU) has a much stronger balance sheet than GM or Ford. Fiat already has roughly $216 million in net cash as of the end of September, but the company will be getting another $6.8 billion in cash in the first half of 2019 thanks to its Magneti Marelli sale. Nelson says Fiat Chrysler shares will outperform Ford and GM stock for the third consecutive year in 2019, thanks in large part to Fiat beating its peers to the punch in shifting away from sedans in favor of trucks and SUVs.

Expect dividend cuts and buyback slowdowns.

In November, Adient (ADNT) announced it was eliminating its dividend to focus on debt reduction, and Nelson says other auto suppliers will likely follow suit in cutting or eliminating dividends in 2019. Nelson says five of the 11 auto parts and equipment companies under CFRA coverage currently have a debt-capitalization ratio greater than 50 percent, a potential red flag for dividend cuts. In addition, Nelson says auto investors should expect a slowdown in share buybacks in 2019 relative to 2018 levels as companies across the board shift focus to preserving liquidity and maintaining dividends.

Predictions for the auto industry in 2019

Here are the seven bold predictions for auto stocks in 2019:

— U.S. auto sales will fall below 17 million.

— China auto sales will slip.

— Retailers will lead the auto group.

— The best-selling car will be the Tesla Model 3.

— GM will backtrack on plant closures.

— Fiat Chrysler will lead Detroit automakers.

— Expect dividend cuts and buyback slowdowns.

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