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Do Auto Sales Signal a Crack in Consumer Confidence?

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April 5, 2016
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In recent years, auto sales have zoomed at high speed as consumers replaced historically high levels of old vehicles on the road. The latest sales figures for March show car sales still rising, but at a slower pace than analysts expected, which has fueled fears that consumers may be hitting a speed bump in the confidence realm.

The annualized car sales rate in March, adjusted for seasonal trends, declined to 16.6 million, or the lowest level in 13 months, says Autodata Corp. That compares to the average analyst estimate of a pace of 17.3 million.

While the Big Three auto makers posted monthly sales gains, they all missed analyst's targets. Ford Motor Co. reported sales rose 7.8% in the month to 253,064. General Motors Co.'s sales for the month eked out a 0.9% gain to 252,128. Fiat Chrysler Automobiles NV posted an 8.1% rise to 213,187.

A Confidence Barometer

Consumer spending fuels nearly two thirds of the nation's gross domestic product. Housing, retail and auto sales combined together can be viewed as a type of "confidence barometer" says JJ Kinahan, chief strategist at TD Ameritrade. "It’s a vote of confidence when car sales are rising. It’s disturbing that they are rising at a slower pace."

The key fundamentals for a strong auto sales rate remain in place, including low interest rates for financing and continuing improvement in the U.S. labor market. Automakers have been a key beneficiary of low gasoline prices over the last 18 months, says Kinahan.

However, automakers have been offering longer-than-ever payment plans for auto buyers now stretching out to 84-months or seven years. "The 84-month loans are in unprecedented territory. In order to reduce people's payments they are extending the time frame," Kinahan says. He wonders what impact this could have on auto sales in the years ahead: "Are we robbing Peter to pay Paul?"

In the U.S. economy, consumer spending and confidence are king. The March sales data shows "a leading area of confidence is starting to disappear," Kinahan notes.

Some analysts remain upbeat on the prospects for U.S. auto sales in 2016. "We estimate U.S. light vehicle sales volume will increase 1.0% to 17.6 million in 2016," says Efraim Levy, senior automotive analyst at S&P Global Market Intelligence.  "We see revenues rising 2% in 2016. U.S. sales should benefit from higher demand and better pricing, while China sales should benefit from a rising industry and GM's new product introductions," Levy says.

Zeroing in on General Motors, the nation's largest producer of cars and trucks, Levy noted: "We believe GM is well positioned to benefit from higher demand in emerging markets such as China. Europe should see narrower losses. Sales and profitability in South America should be weak in 2016. Investment in new products and new mobility products should weigh on margins."

Do Your Homework

Investors analyzing the automaker arena should "understand where those companies make their money," Kinahan says. General Motors used to make 50% of its revenues from China. But, that number has fallen while new leases are doing well," Kinahan says.

TD Ameritrade clients can use the company profile analyzing tool to learn more about where revenues are derived from. Log in to the TD Ameritrade thinkorswim® platform and click Analyze > Fundamentals. Type desired symbol in symbol box in upper left corner and explore sections like Overview, Company Profile, Company Details, and What Drives the Stock.

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FIGURE 1: UNDERSTANDING COMPANIES AND FUNDAMENTALS.

Use the TD Ameritrade thinkorswim® platform to conduct fundamental research of a company. In this example, we take a closer look at General Motors (GM) and its Business Summary. Data source: Trefis. Information/estimates provided by Insight Guru, a separate and unaffiliated firm. Stock prices are impacted by numerous factors and estimates of prices in the future are not guaranteed. Image source: the TD Ameritrade thinkorswim® platform. For illustrative purposes only.

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