Speed Bump Ahead for Autos? Factors for Investors to Consider

The auto industry has been profitable since the 2007-09 financial crisis, but what might lie ahead? Here are some factors to consider.

Print
https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Crossroads: Future of the Auto Industry
3 min read

U.S. automakers have come a long way since the depths of the 2007-09 Great Recession. The industry has been solidly profitable, and the past two years brought records in terms of vehicles sold and sales prices.

Yet, after U.S. vehicle sales last year declined for the first time since 2009, some analysts say we've reached a "peak auto" phase.

What gives? We all still need to get around, and the automotive sector, as a major employer and critical economic cog, bears watching for investors (motor vehicle and parts dealers accounted for over 20% of the $5.76 trillion in U.S. retail sales in 2017, according to the Commerce Department).

Here are a few considerations for investors.

1. What’s Under the Hood? Profits

Many analysts have reported they expect a somewhat softer year ahead for vehicle sales.

“The industry is pretty healthy now,” says Efraim Levy, an analyst with the research firm CFRA. Automakers “have strong balance sheets and good cash flow. They’re in a better position to handle a cyclical downturn in demand and remain profitable, because of the belt-tightening they did with the last recession.”

The recession, and accompanying bankruptcies for some automakers, had a couple of longer-term benefits, Levy noted, erasing billions in debt and cutting unproductive capacity.

“Automakers are focused more on profitability over volume,” Levy says.

2. How Many Rolling Off the Lots?

CFRA estimated 2018 U.S. light vehicle sales, a widely-followed benchmark for the industry, will total 16.9 million units, down 1.9% from 17.2 million in 2017. That’s “still a healthy level,” Levy says. “It’s hard to find an industry participant who wouldn’t be happy” with an annual number around 17 million, he adds.

The National Automobile Dealers Association, in a December forecast, pegged 2018 new car and light truck sales at 16.7 million units and cited an overall positive economic outlook, including expected GDP growth of 2.6%, employment growth averaging about 180,000 jobs a month and an average national pump gasoline price of about $2.50 a gallon.

3. Watch the Vehicle Mix, Sticker Prices

The expected decline in overall vehicle sales may be mitigated to some extent by the increasing popularity of higher-margin sport utility vehicles (SUVs) and pickup trucks, analysts say.

The vehicle segment mix “will continue to favor light-truck sales,” Patrick Manzi, senior economist with the auto dealers association, said in the December statement. Light trucks’ share of new light-vehicle sales in 2018 is expected to surpass 65%, up from 64% at the end of 2017, Manzi said.

Meantime, your new car isn’t getting any cheaper. In December, the average price for a new light vehicle reached $36,113, up 1.6% from the same month in 2016 and an all-time high, according Kelley Blue Book Co.

4. Electric Avenue

Analysts say sales of electric and hybrid cars is expected to continue to grow though remain a relatively small fraction of overall sales – for now.

The automobile industry “is in the process of its electrical revolution,” CFRA analysts say in a report. “The car of the future will be an-all electric or a hybrid-electrical vehicle, with much connectivity.

While electric vehicles are estimated to make up only about 1% of U.S. sales volume in the U.S., “there has been a lot of merger-and-acquisition (M&A) and partnership activity to prepare for the electric and autonomous vehicle future,” CFRA adds.

5. What Could Go Wrong? Overdoing Incentives, Surging Oil Prices

One risk to automaker profits, Levy says, could be a stepped-up incentives battle among dealers aiming to entice customers.

In recent years, the industry has been fairly disciplined in this regard, Levy says, though he expects incentives to increase in 2018. “When volumes go down, you look for ways to maintain volume or gain market share,” he says. “The risk is, that discipline may break.”

Incentive spending “was a concern in 2017,” averaging 10.4% of the manufacturers’ suggested retail price, Kelley Blue Book said in a recent statement. “But encouragingly, this figure held relatively flat over the final quarter of the year.”

There’s also the question of how much it will cost for motorists to fill their tanks, with oil prices recently jumping to 3 ½-year highs, and a further rally would pull up gasoline prices as the summer driving season nears.

Still, oil is well-below the peaks above $100 a barrel from a few years ago, and pump prices remain “pretty moderate,” Levy says, and likely not at levels that would give consumers pause when considering a new car.

Call Us
800-454-9272

TD Ameritrade and all third parties mentioned are separate and unaffiliated companies, and are not responsible for each other’s policies or services.

adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.

Scroll to Top