An ugly year for shares of automakers and dealers may get much uglier.
The amount of negative data points on the industry's health continues to creep higher. In effect, the cold, hard data are rightfully trumping the industry's usual positivity -- which more recently has centered on everyone wanting a newish car due to significant upgrades in technology. Hey, the pitch to investors worked great in 2015 amid rock-bottom interest rates, easy lending standards by banks (still) and visuals swirling around the Internet of cars that could order pizza from the confines of a driver's seat or unlock with the swipe of a smartphone.
The positivity continued within Alcoa's (AA) earnings results on Monday evening. Execs reiterated a bullish outlook for North American auto production (minus the troubled heavy-duty truck segment, which has been hit by weak industry production). Further, auto sheet shipments grew 38% in the first quarter, and are projected to rise by about 35% in the second quarter (in part helped by Ford's new aluminum truck).
Last year was a record for car sales in the U.S. as consumers bought about 17.5 million light vehicles. But investors should continue to approach the entire sector with caution (especially the auto dealers, who are seeing pressured used-car prices and weakening traffic to stores for new cars), despite valuations that appear attractive ¿ Ford (F), for example, trades at a mere 6.2x forward earnings -- and Alcoa's exuberance. The narrative is just not in favor of the group medium term. (Ford is part of TheStreet's Dividend Stock Advisor portfolio.)
4 Signs the U.S. Auto Market Is in Trouble
Hertz (HTZ) warning: Shares of the car rental company plunged about 10% on Monday as it reduced its forecast for U.S. rental revenue. Annual revenue measured in available car days will be unchanged to 1.5% lower year over year. Previously, the company's outlook was for 1.5% to 2.5% growth. Said Hertz CEO John Tague, "The pricing pressure experienced late in 2015 further intensified in the first quarter of 2016."
The outlook cut reinforces the budding view that automaker sales were artificially inflated in the second half of 2015 due to sales to rental agencies. With these cars not being aggressively (which may be an economic tell altogether) used and worn out, Hertz will have no impetus to place new orders with manufacturers (or lower orders than the market expected).
Bearish CarMax comments: Traffic to CarMax's (KMX) retail stores fell slightly in the most recent quarter. While execs tried to pin the blame on people buying cars online, the reality is that people frequented a dealer less, which remains the top way to purchase a car. Meantime, used-car prices continued to be challenging for CarMax due to elevated inventory levels. It will take time for CarMax to work off its excess inventory in this type of mixed macroeconomic backdrop. All in all, a different environment for the company in 2016 vs. 2015.
New car data are uninspiring: In March, total sales of cars fell by more than 10% from the prior year. Sales so far this year are down 3.5% from last year's torrid pace. The sluggish sales of new cars come despite incentives by manufacturers being on the rise. According to Autodata, the average new-car sale in March carried $3,110 in total incentives, up by about $384 year over year. In January and February, average incentives were up $404 and $353 over their year-earlier comparisons, respectively.
Used-car prices continue to be weak: According to the Manheim Index, which tracks wholesale used-car prices adjusted for mileage, prices fell 1.6% year over year in March. It marked the third straight monthly drop in prices.
