April was the worst month for U.S. auto sales since at least the mid-1970s. Investors with an eye for history might paradoxically see that as a rare signal to buy auto stocks.
The risk—and it seems an overwhelming one in a world where Tesla’s market value is roughly twice that of the Detroit Three combined—is that the auto industry has entered a new era.
A closely watched measure of U.S. light-vehicle sales, the seasonally adjusted annual rate or SAAR, plunged to just 8.6 million in April as a result of consumer lockdowns to slow the spread of the Covid-19 pandemic. For most of the past five years, including as recently as February, the SAAR has been roughly double that, fluctuating around the 17 million mark. In the global financial crisis, the measure hit a low of 9 million in February 2009.
Sales in May should be better. Auto sales fell off a cliff in the final week of March and since then have been slowly recovering, according to weekly data from J.D. Power. Activity on Apple Maps suggests that driving has been rebounding at a similar rate, despite stay-at-home orders. On the first Friday in April, U.S. route requests by drivers on the iPhone platform were 57% lower than on the first Friday in March. By May 1 they were only 37% lower.
U.S. auto stocks generally have been a terrible investment in recent decades, but there have been years when it has paid to own them. The best periods have come at the very start of economic recoveries, such as in 1992 and 1993 and again in 2009 and 2010. Could 2020 and 2021, as the U.S. emerges from its coronavirus funk, offer another window of outperformance?
Importantly, no U.S. manufacturer looks likely to go bust this time around. The most fragile of them, Ford, sold $8 billion of bonds last month, taking advantage of the U.S. Federal Reserve’s aggressive support for credit markets in the early weeks of the crisis. First-quarter results from General Motors and Fiat Chrysler this week will underline the extraordinary financial pressures imposed by the recent sales collapse, but may also offer comfort that the trend is reversing.
Still, investors should remain very wary of the historical “playbook,” and not just because the cause and abruptness of the current crisis have been particularly unusual. The bigger problem is that sales may no longer be what matters most.
Ford sold $8 billion of bonds last month.
Photo: Krisztian Bocsi/Bloomberg NewsInvestors have had structural as well as cyclical reasons for avoiding the auto sector in recent years. The cycle may have moved on, but the structural problems are still there—above all the rise of electric cars, which is forcing Detroit to invest vast sums in new technologies with uncertain return prospects and worrying implications for its existing factories. The rapid rebound in Tesla’s stock price since March suggests investors aren’t overlooking the risks and opportunities created by this technological transition just because car sales and gas prices have cratered.
So far, the investors most interested in the sales-cycle trade are hedge funds with an investment horizon of a few months, says Emmanuel Rosner, U.S. autos analyst at Deutsche Bank. Long-term investors have yet to show much interest in the sector.
It might stay that way. While a beneficial new cycle in auto sales is probably now starting, more profound questions about Detroit’s future remain unanswered.
Write to Stephen Wilmot at stephen.wilmot@wsj.com
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May 04, 2020 at 05:50PM
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Auto Sales Are Accelerating, Auto Stocks Might Not - The Wall Street Journal
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