After six strong years of sales, U.S. auto sales have been slipping, and this may be the first year the industry doesn’t set a consecutive record.
In early November, auto industry publication WardsAuto reported that October U.S. auto sales fell about 6%, even though dealers pushed consumer discounts on popular models, according to news reports.
The idea that auto sales would temper eventually has dogged share prices for the big car makers. Shares of Ford (F) and General Motors (GM), the top two U.S. manufacturers, are down about 33% and 25%, respectively, from their 2014 highs.
And it’s possible that 2017 may not be a better year for auto sales. CFRA forecast 2017 sales to fall between 1.5% to 2%, saying business may be a little tougher for dealers, who may have to offer more discounts to lure buyers, putting pressure on manufacturers margins.
But there are some bright spots for the industry. Although dealer incentives have been rising, Kelley Blue Book said the average U.S. transaction price for autos was $34,663 in October 2016, with new-car prices up by $783 from October 2015. These incentives offset the rise in price, but that may change in the future.
“With industry sales reaching a potential plateau, automakers should adjust production to better match demand, which should reduce the need for such high incentives," said Tim Fleming, analyst for Kelley Blue Book.
And the vehicles that Americans recently wanted to buy are sport utility vehicles and light trucks. Five of the top 10 best-selling brands are light trucks or SUVs, according to Autotrader data. The top three best sellers were all light trucks: the Ford F-Series, Chevrolet Silverado, and Ram 1500. The Toyota Camry and Honda Civic rounded out the top five.
Another underreported category of strong sales are luxury cars. Kelley Blue Book noted high-end performance cars and high-end luxury cars saw the greatest increase in price between September 2015 and October 2016, up 2.4% and 1.8%, respectively. That was the greatest gain of all auto categories.
Portfolio Pit Stop
The question for the auto industry in the short term may rest on whether the U.S. economy can accelerate. A pickup in the U.S. economy may encourage more buying of cars and light trucks, especially if gasoline prices stay low, says John Person, president of NationalFutures.com.
Another idea is to look at automotive stocks from the income side. Historically, dividends paid to Ford and GM shareholders have been attractive for income investors, but keep in mind a high dividend yield may look great at first glance, but there are times when the reason the yield looks attractive is because share prices are muddling and make the situation look better than reality. If the dividend stays the same and the stock falls, the yield goes up. Investors tend to look at the source of higher yields, not just the yield itself.
Investors could look to industries tied to auto production, such as auto-part retailers like AutoZone (AZO) and O'Reilly Automotive (ORLY), or suppliers like Delphi Automotive or BorgWarner (BWA).
While the auto industry tries to reassert itself, now might not be a bad time to kick the tires and look under the hood in evaluating auto related stocks.
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