By Saumya Vaishampayan in New York and Jeff Bennett in Detroit
The past year set a record for sales of cars, but investors are
signaling doubts about the companies that make them.
Shares of auto makers such as General Motors Co. and Ford Motor
Co. began sliding late last year. This year, they have fallen even
faster than the battered broader market.
Analysts and investors attribute the declines to worries that
rising U.S. interest rates could crimp auto finance and to fears
that auto sales may have peaked. They are also concerned that the
slowdown in China, the world's largest car market, may be worse
than expected. The result has been a setback for an industry that
in the U.S. just enjoyed its best year ever.
Shares in GM, the No. 1 U.S. auto maker by sales, have dropped
11% this year through Monday's close. Ford's stock has fallen 9.4%,
and shares in AutoNation Inc., the nation's largest dealership
operator, have slumped 19%.
The drops stand out against the 5.9% decline for the Dow Jones
Industrial Average, which posted its worst ever start to a year.
They come even after a combination of low gas prices, a
strengthening labor market and low interest rates propelled U.S.
car sales to 17.5 million in 2015, surpassing a peak last hit 15
years ago.
"How much higher than 18 million units can we go?" said Brian
Hennessey, a portfolio manager at Alpine Funds, which manages $4
billion. "It's pretty much a peak number."
AutoNation Chief Executive Mike Jackson said he believes the
fourth quarter of 2015 will mark the start of a plateauing of
sales.
"Everybody was talking about how great the month of December
was," Mr. Jackson said on the sidelines of the North American
International Auto Show in Detroit on Monday. "But if you take away
the extra selling days and the incentives, sales were flat in what
is a bellwether month."
The auto industry's seasonally adjusted annual selling pace fell
to 17.3 million in December from 18.2 million in November.
Sentiment in the options market has turned sour in recent days,
suggesting that traders don't see the auto makers' stocks
rebounding any time soon. Trading in options to sell Ford or GM
stock on Thursday and Friday sharply outpaced trading in options to
buy the shares, according to data provider Trade Alert.
A Ford spokeswoman said the company remains focused on
delivering profitable growth for its stakeholders. "We do not run
our business based on day-to-day stock changes," she said. GM
didn't immediately respond to a request for comment.
Mr. Jackson is warning auto makers, especially those producing
luxury cars, to reduce output or face a pricing war that will hurt
the industry overall. He said AutoNation has cut its car orders and
is instead bulking up on pickup trucks and sport-utility
vehicles.
"Some auto makers have moved to a push rather than a pull
mentality," he said. "Rather than waiting for dealers to order they
are sending more inventory. It's a recipe for disaster."
Mr. Jackson's comments echo his warning last Wednesday that a
bulging inventory of unsold cars is beginning to erode profit
margins.
The comments fueled investors' concerns that manufacturers will
have to turn to deals or discounts to get customers to buy more
cars.
"Manufacturers could lose pricing power," said Peter Stournaras,
portfolio manager of the BlackRock Large Cap Series Funds.
Mr. Stournaras said he prefers shares of auto-parts makers to
auto makers. He figures that low gasoline prices could encourage
consumers to drive more, in turn prompting a greater need for
replacement parts.
Shares of Delphi Automotive PLC, a U.S. auto-parts supplier,
have dropped 12% so far this year through Monday.
Some investors say the selloff in car makers' shares has been
overdone. Ford recently traded at 9.0 times the last 12 months of
earnings, according to FactSet. Its five-year average is 9.5. GM's
price-to-earnings ratio was recently 6.2, less than its five-year
average of 9.1. AutoNation recently traded at 12.3 times the past
year of earnings versus its five-year average of 18.0.
These investors argue that a monthslong slump in oil prices has
fattened consumers' wallets, and the continued recovery in the
labor market has begun to result in slightly higher wages. That,
they say, bodes well for continued strength in auto sales.
"All the key metrics that we use to gauge the health of the auto
industry are as healthy as they have ever been," said Amit Kapoor,
senior equity analyst at Loomis, Sayles & Co. Mr. Kapoor owns
GM shares.
Another reason for optimism, these investors say: Cheap gasoline
prices remain a powerful driver for sales of the big cars that are
most profitable for car companies.
"The auto makers generally make more money selling big cars,
like pickup trucks and SUVs, than they do making sedans," said
Annie Rosen, portfolio manager for Fidelity Select Automotive
Portfolio. "When you have low gas prices, like we do today, the
average consumer willingness to buy a car that uses more fuel goes
up."
Sales of trucks and sport-utility vehicles helped Ford and GM
post record operating profits in North America in the third
quarter. Ford is set to report fourth-quarter earnings Jan. 28 and
GM is scheduled to post results Feb. 3.
Write to Saumya Vaishampayan at saumya.vaishampayan@wsj.com and
Jeff Bennett at jeff.bennett@wsj.com
(END) Dow Jones Newswires
January 12, 2016 14:42 ET (19:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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