If you simply go by information publicly released by the auto manufacturers you’d think car companies are booming. Both General Motors (GM) and Ford (F) say their sales are the best in years.
GM released detailed data from its 2013 first quarter that looked great… until you got to the dealer inventory numbers. The most recent six months (ended March 2013) were also the six highest absolute inventory numbers in GM’s post-bankruptcy history. Worse still, the full-size pickup category, where the best profits are made, had ballooned to 117 days’ worth of sales.
The National Automobile Dealers Association's guide for new-vehicle inventory turn is eight times a year. That makes about a 46-day supply at the desired dealer floor plan level. GM’s overall dealer back up is way too high at 82 days.
The metal that is moving via large rebates, special lease deals and as low as zero percent financing. Subprime auto loans are now challenging student loans for the "most likely to be defaulted on" title. Trade journal Automotive News wrote about the sad details today.
Our leaders refuse to learn from the previous crisis. Read the sickening full article here.
The ads in Sunday’s Philadelphia Inquirer tell the truth about how sales are being made. Almost everything is due to no/low down payments, above market trade-ins, heavy discounting and/or subsidized interest rates. This is happening even with in-demand, value-priced brands like Toyota and Hyundai.
Shares of GM and F trade for well above their 2012 lows. They are each also far off their 2013 peaks. Projected P/Es of less than 6.1x (GM) and 7.2 (F) the Zacks 2014 estimates shows how skeptical the market is about the validity of those projections.
That’s for a good reason. Value Line notes Ford’s earnings predictability as falling in the lowest 10% of the 1,700 companies in the main research universe. Ford scores badly in four other categories as well.
Standard & Poors’ historical data shows how quickly Ford’s profitability turned into multi-year losses. That occurred prior to the housing bust of 2007.
The good times for GM and Ford could come to an end quickly. It's possible they already have but that the bad news is being masked by inventory channel stuffing.
Last week's poor job creation numbers and ultra-low labor participation rate don't bode well for auto sales. Shares of GM and Ford appear to be value traps and should be sold. There's a good reason they have sold off even as the broad market moved to new highs.
Avoid both stocks.
Disclosure: No positions
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