This year wasn’t great for the auto industry as Ford (F, Financial) and General Motors (GM, Financial), the two largest automakers of the country, struggled to keep their sales numbers moving. Their stock price subsequently suffered as well, with Ford down nearly 10% since the start of the year and General Motors also having lost ground and only up by 5% year to date. The entire auto segment suffered this year as sentiment towards the industry took a turn for the worst, even as auto sales in the country were near all-time highs.
Thankfully, U.S. auto sales didn’t nosedive during the year but stayed above the 16 million cars per month mark. This was only partially good for the auto companies because the sideways movement of monthly sales numbers meant both Ford and GM had to outdo each other to keep their car sales moving. As competition between the top two heats up in a tight market, margins get tighter.
Both GM’s and Ford’s top and bottom lines are still completely dependent on the U.S. market and, while conditions in the world’s largest economy weren’t really bad, they weren’t exactly ideal either. The odds of increasing sales from the current 16 to 17 million range are extremely small, and even if that happens, it may only be a brief surge before they return to normal levels.
“Our view is the industry is at a relatively strong level, but the retail market is softening and the pricing environment is getting tougher. And as you've seen and as we've communicated previously, we have taken some production adjustments on a number of selected models to match production to demand and that's consistent with our strategy,” said Mark Fields, CEO of Ford during the third quarter earnings call.
The GDP forecast for 2017 is for a mild rebound, and the broad expectation is that the economy should do relatively better than it did in 2016. As long as the U.S. economy keeps improving and credit is available, car sales have a relatively high probability of staying around the current levels, moving up a few months and moving down the rest. Unfortunately, that will do nothing to relieve the pressure Ford and General Motors stocks are going through because, again, both these companies are completely dependent on their respective U.S. divisions for all of their profits.
Both these stocks are trading at less than 6 times earnings and are extremely cheap at the current price point, while their above 4% yield makes them attractive investment options as well. Don’t count on the stocks to give you significant returns otherwise, because current market conditions don’t justify such an outlook.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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