The auto industry in the United States is the world’s largest, selling more than 15 million cars every month since January 2013. As sales climbed above 17 million in 2015, the cyclical nature of the industry made investors and analysts gear up for a downturn in the market.
Naturally, auto stocks went through a subsequent meltdown, and a recovery seems too far out of reach for both General Motors Co. (GM, Financial) and Ford Motor Co. (F, Financial). Both companies are trading around 0.3 times sales and far below 10 times earnings.
The current state of the U.S. auto market
Fortunately, the U.S. auto industry did not collapse under its own weight. Sales have been moving sideways since peaking above 18 million in November 2015. But the problem is the momentum has been slowly declining since December 2016.
According to the chart below, light weight vehicle sales in the U.S. have declined from 18.319 million in December 2016 to 16.583 million in May 2017.
But if you compare sales between December 2016 and May 2017 to sales in the December 2015 to May 2016 period, the numbers tell a completely different story. The auto market moved 103.181 million vehicles over the last six months, compared to 103.808 million in the prior period, a decline of 627,000 units.
While sales volumes have come down, they have not cratered.Ă‚
Apart from the fear of cyclicals, the threat of Tesla Inc. (TSLA, Financial) running away with the market is also a major concern, further pressuring auto stocks. Tesla notched up more than 400,000 reservations for its Model 3. While the company is still many years away from challenging Ford and GM, the level of demand does cast some doubt over the companies' futures.
What’s worse is Tesla is valued at more than $64 billion as of writing. Surpassing GM and Ford, Tesla’s market cap has even challenged that of German automaker BMW AG (XTER:BMW, Financial). Cathie Wood, CEO of ArkInvest, estimates Tesla could be valued in “multiples of $50 billion” in a few years.
This puts GM and Ford under even more pressure in terms of how their stocks are valued.
Auto sales do not have much room to grow from here, which means both stocks are going to continue moving sideways.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
