Are Autos Out of Gas? : Wall Street Fears a New-Car Glut Will Mean an End to the Big 3’s Rally
The Big 3 appear in danger of losing their Big Mo’.
Stocks of the three major U.S. auto makers have surged in recent weeks, making them one of the market’s strongest sectors so far this year. But judging by Wall Street’s decidedly neutral stance toward the companies, investors might soon hit the brakes on the stocks’ momentum.
The Street is worried that a glut of new cars--and the auto makers’ willingness to offer bigger price incentives to gain market share in that glut--will mean eroding earnings for General Motors Corp. (ticker symbol: GM), Ford Motor Co. (F) and Chrysler Corp. (C).
Industry trackers estimate that U.S. sales of cars and light trucks will total about 15.2 million this year, which would be a meager increase from the 15.1 million sold in 1997.
But even that small gain was put in doubt two weeks ago when industry leader GM said it planned to cut its North American vehicle production 5.1% in the second quarter compared with the same quarter a year earlier.
And industrywide, year-to-date production through March 6 was off 6.1%, according to the trade journal Ward’s Automotive Reports. That’s a clear sign that inventories are bulging in the face of lackluster sales.
One culprit: consumers’ growing desire to lease, rather than buy, cars and trucks. The trend is putting late-model vehicles back on dealers’ lots in huge numbers and taking away from new-car sales. Thus, sales of new vehicles are flat even though economic trends--including relatively low financing rates--indicate they should be much stronger.
*
Then there’s the Japanese yen’s weakness against the dollar, which in effect gives U.S. consumers more purchasing power on Japanese exports--whether cars or parts for U.S. assembly plants. As a result, Japanese cars are selling at very attractive prices, another headache for Detroit. (That’s also why the American depositary receipts of Honda Motor Co. [HMC] and Toyota Motor Corp. [TOYOY] are off 7% and 8% so far this year, respectively.)
Small wonder, then, that even the analysts recommending the Big 3’s stocks are doing so tepidly.
“We do not see, at this time, a convincing, table-pounding ‘buy’ argument for auto maker stocks,” analysts Philip Fricke and Brett Hoselton of Prudential Securities said in a recent report.
The stocks’ run-up this year is one reason for the lukewarm opinion toward buying the shares now. Taken together, the Big 3 have soared 20% since Jan. 31--more than double the 10% gain of the bellwether Standard & Poor’s 500 index--making them fully valued in the eyes of some analysts.
The stocks rallied for several reasons. Investors initially viewed the anticipated 15-million sales figure this year as a positive because at least it was holding steady with 1997. There’s also a growing consensus that years of cost-cutting by the auto makers is paying off on their bottom lines. GM’s stock-buyback program also gave that stock a lift.
*
Also, the Big 3 stocks are relatively cheap, selling for a combined 9.5 times their expected 1998 earnings, compared with a 22 multiple for the S&P; 500. (Note, though, that a low P/E is nothing new for this mature, slow-growth industry; the Big 3 had a combined multiple of only 5.5 times earnings in the mid-1990s.)
Regardless, investors’ confidence has been eroding--and analysts’ questions about the auto makers’ outlooks have been increasing--as the industry’s sales and production figures keep falling behind last year’s pace.
Consider GM: Its new models aren’t selling as some analysts expected, its share of the U.S. light-vehicle market (though still No. 1) wallows near the 30% mark, and the company is paring production. So there’s growing speculation on Wall Street that GM’s 1998 profit will come up short of expectations.
For instance, Nicholas Lobaccaro of Merrill Lynch Inc. is expecting GM to earn $7.60 per diluted share this year, much less than the $8.09 a share that a consensus of auto analysts is forecasting, according to figures from research firm IBES International.
Others say there are still reasons to consider buying the stocks. First among them: The “industry is more committed than ever to rewarding its shareholders,” said David Bradley of J.P. Morgan Securities Inc., who recommends GM and Ford.
Ford, for instance, is expected to sell fewer cars this year, according to some analysts. Yet they still like the stock, in part because Ford is about to spin off its 81% stake in its financial services unit Associates First Capital Corp. (AFS), which sold a minority stake to the public in 1996.
Ford holders are set to receive $21.30 of Associates stock for each of their shares, or a total of $26 billion. Ford paid $3.4 billion for Associates in 1989.
*
Speculation also abounds that Ford will spin off its remaining 80% interest in Hertz Corp. (HRZ), the car rental giant that went public nearly a year ago. Both spinoffs would give Ford additional cash to buy back its shares, which could boost their price.
GM, meanwhile, just launched a $4-billion share-repurchase program after completing a $2.5-billion buyback earlier this month. There’s also talk that GM will eventually spin off its ownership of Hughes Electronics Corp. (GMH), which could further enrich its holders.
There’s one other factor in the stocks’ favor: All three auto makers pay above-average dividends--currently between 2.8% and 3.8%, well above the S&P; 500’s 1.5% yield.
Chrysler is recommended along with GM and Ford by Prudential’s Fricke and Hoselton, partly because they like the prospects for some of its new models. Chrysler’s sales should go up this year “if Dodge Intrepid, Chrysler Concorde (both are large-size cars) and Dodge Durango (a sport-utility vehicle) sell as well as we think they will,” they said.
Chrysler also is known as one of Detroit’s toughest cost cutters, which should lead to “positive earnings surprises in 1998,” they said.
And what about the auto makers’ parts suppliers? That sector has been strong too, thanks partly to speculation of more mergers in the industry after SPX Corp. (SPW) launched a $3-billion takeover bid for a rival auto parts maker, Echlin Inc. (ECH), last month.
Among the field’s other players, Superior Industries International Inc. (SUP), a Van Nuys-based producer of wheels, has jumped 21% so far this year. That’s one reason Lehman Bros. analyst Joseph Phillippi does not have a “buy” on the stock.
Wendy Beale Needham of Donaldson, Lufkin & Jenrette Securities does have a “buy” on Goodyear Tire & Rubber Co. (GT). She cites the tire maker’s new five-year plan to slash production costs, introduce new manufacturing technology and widen the company’s revenue base, in part with acquisitions.
Times staff writer James F. Peltz can be reached at james.peltz@latimes.com
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
DOWNSHIFT?
The Big Three auto makers have been among the stock market’s hottest groups in recent weeks, but now Wall Street is growing more neutral toward the field. Here are the players, plus some key providers of auto parts:
*--*
Ticker Monday % Change Dividend Stock Symbol Close from 1/31 P/E* yield Chrysler C $42.00 +23% 9 3.8% Ford Motor F 60.19 +18 11 2.8 General Motors GM 71.31 +23 9 2.8 Federal-Mogul FMO 49.81 +11 21 1.0 Goodyear Tire GT 70.75 +13 14 1.7 Superior Industries SUP 31.25 +18 14 0.9 S&P; 500 +10 22 1.5
*--*
*Price-to-earnings multiple based on analysts’ consensus estimates of 1998 earnings.
Source: Bloomberg News
