Why auto stocks aren’t on a roll
Investors apathetic despite hot sales
Despite strong profits in North America, where the auto industry is flourishing, the stocks of General Motors and Ford are lacking horsepower. Will they ever break out of their long slump?
That may depend on whether investors believe there’s any growth potential left in the U.S. auto market, where GM and Ford — the highest-selling automakers in the U.S. through June — make most of their profits. But China is a factor, too.
Barclays analyst Brian Johnson described investors’ appetite for U.S. auto stocks as “soft” with sentiment “ranging somewhere between apathy and skepticism.”
The Dow Jones industrial average is down about 3% for the year, but GM’s stock is down almost 9% for the year. Ford’s stock is down about 4.5% for the year.
One key reason: The industry believes U.S. auto sales have flattened out. Sales for 2015 are expected to top 17 million for the first time since before the Great Recession. That’s terrific news for the top sellers in the U.S.: GM, Ford, Toyota, Fiat Chrysler, Honda, Nissan and Hyundai-Kia.
But the caveat is bad news: Few analysts expect the sales rate to top the mid-17-million range anytime soon. And as any experienced investor knows, the market values potential over credentials. Rather than calling it a peak, Johnson called it “a plateau,” with sales possibly hovering in the same sphere for several years.
“Given that perception, it will be very tough for the stocks to work,” Johnson said.
Meanwhile, a slowdown in China — the world’s largest market — is cause for more concern. GM posted an impressive 10.2% profit margin in China in the second quarter. But those profits may disintegrate if China’s auto market withers.
The same is true for Ford. The company is riding high in North America China is a key growth market for Ford, creating additional concern that the company’s bottom line will take a hit.
“Concerns of a U.S. peak and China headwinds unfortunately carry the day — limiting upside for the stock,” Johnson said.