"It never rains but it pours"
The above phrase applies well to US Auto Industry. Everything that can go wrong has now gone wrong for the US Auto companies in last few weeks.
Sample this: This is how Ford stock has collapsed in last few days
You will ask: What happened - Well Ford came out and slashed its earnings guidance for a variety of reasons. (Guidance: 30-35 cents against expectations of 47 cents. Last year: earnings in that quarter: 68 cents)
Everything was going right for US Auto companies till a few months back. The Industry witnessed impressive growth phase between 2014-2016 thanks to a dramatic drop in oil prices and ultra-low-interest-rate environment.
US Auto companies have come out with very impressive sales numbers for the month of Nov...one sector that has remained strong for while now
— Deepak Singh (@smarket) December 4, 2016
People were borrowing like crazy. The Average monthly care loan payment now stands at $506/month
The total of outstanding car loans in the U.S. reached $1.1 trillion in the fourth quarter of 2015 - cheap credit + cheap fuel =more SUV
— Deepak Singh (@smarket) March 11, 2016
But as we say - all good times come to an end. Ally Financial - major auto lender - which made the most of the auto boom - and has $66 bn auto loan exposure - warned about profits going ahead and see the market reaction for yourself
That's not all -Profit margins are shrinking for all major auto players as they prepare for new future of self-driving cars and electric vehicles.
Here's what Auto Industry is staring at right now:
1. Higher Commodity Costs - Lower margin
2. Disruption (Electric Vehicles and Self-driving Cars) - which means more investments
3. Huge Inventory Build-up - Lower pricing power (As a result: User car sales prices declining pretty fast)
4. Rising Interest rates - Demand headwinds
5. Slow down even in China - Volume Hit
Ford is now trading at PE of less than 6 and a dividend yield of 5% and yet market participants not buying the stock. Even GM with relatively better fundamentals have come down
Having said all the above - There is always a Bull market somewhere even in an industry surrounded by bad fundamentals. Do you know what is the symbol of Ferrari: RACE and just look at the stock chart
The stock is up approx 70% over last one year because wealthy consumers are doing good and interest rate is the last thing they have to worry about. Luxury brand = Strong pricing power and no margin compromise.
How does the market see value?
- Ford and GM trading at PE of 6 with dividend yield of 4-5% - No takers
- RACE trading at PE of 30 with dividend yield of 1% and people are buying like crazy :))
I hope you found the story interesting and there was something to learn on how to look at industry fundamentals and individual stocks. Do let me know your comments
Disclaimer – The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers