Declining Auto Sales Will Weigh Further on Auto Stocks

Auto Stocks

Stocks of U.S. automakers GM and Ford have been far less than exciting anyway, but declining sales numbers are expected to make them even less exciting in 2019.

The forecast for U.S. auto sales for 2019 are in. Edmunds projects total unit sales of 16.7 million this year, down from 17.3 in 2018. Sales have come in around 17 million the past few years, and our going below that in the coming year is not bullish news for stocks such as Ford and GM who already haven’t been performing very well at all.

Value investors will point out that these two stocks look like real bargains when it comes to their price to earnings ratio, sitting at about 25% lower than the market average. If price to earnings really mattered that much, this might be a reason to buy them or hang onto them, but price to earnings ratios are more a reflection of how attractive a stock is, which lower ones meaning less attractive.

The price of a stock speaks more to the future than the past, and current price to earnings ratios are all about the past, what a company earned last quarter or last year as opposed to where they are headed. The market doesn’t see these companies headed in a direction that would have them very competitive with other stocks in the market.

When we see attractive valuations, the message should probably not be that these are a bargain but that investors don’t like them as much. What the market likes, it prices higher, and what the market doesn’t like, it prices lower. Not having the market like your stock very much is therefore not a good thing generally, and unless something happens to really change this outlook, we should just expect more of the same, which is not a bullish signal at all.

Ford in particular has been a pretty terrible stock for a long time. Ford is a perfect example of how we can diversify our portfolios too much. If Ford stock is included in it, or if it has been included in it over the last 20 years, this has been a clear mistake.

During this time, the S&P 500 is up about 240%. Ford, on the other hand, traded at around $35 a share in 1999, and now only sits at $9.13 today. They say stocks go up over this long of a timeframe, but not all do, and if after 20 years of investing in a stock, you are down 75%, that’s even beyond terrible.

Ford has also been in a 5-year slide, where they have lost almost half their value over this time. 2018 saw their stock lose 38%, at a time where the business did slow down but not by all that much. Ford hasn’t been a darling in either the long-term, medium term, or short term, and this is a stock that a lot of people have avoided and the charts clearly show it.

GM Stock Has Fared Better, But Still Below Average

GM stock hasn’t fared quite this badly, and few stocks have in fact. GM’s stock may not be that attractive, but Ford stock is really a dog among dogs. GM did lose 18% in 2019, a year where the market was pretty flat, but is least up 15% in 2019 and really haven’t performed that badly relative to the market over the last few months at least.

GM is therefore getting its fair share of market love during this current rally, but investors are concerned that it won’t be able to keep pace if things sour a bit from here, as its performance in 2018 was testimony to.

Investors are concerned with much more than how a stock has done over the last few months though, and it’s when they extend their horizon out to the longer-term that their concerns with these big auto makers may have their outlook wilting. Automakers at least seem to be more preoccupied with things like market share than even profit, and while GM’s numbers only declined a bit in 2018, their profits sure shrank, and were more than cut in half in fact.

When Your Profits Go Down, Your Stock Price Usually Does Too

Profits are how we keep score in business, so when they decline like this, this does strike fear into the hearts of investors. Trends in stock prices aren’t about what you are doing now, because that is already priced in, and as time goes on it is how the outlook of a company is changing, and Ford and GMs are changing for the worse.

If your profit margins are going down and your sales are going down as well, this is not a prescription for increased success, and increased success is what the market expects. If we look deeper into what may be behind this decline, we see things like the economy slowing down weighing on this, interest rates going up making it more expensive to own, competition from foreign automakers, and people simply being less willing to buy a new car as often as they used to.

It doesn’t really matter very much why, the fact that the sales numbers and the profits are going down is enough to tell the story here. The monthly sales reports that just got released have things looking a tad better, but neither stock got any real boost for this, as this is really not about last month, it’s about the coming years.

Automakers face a particular challenge due to the shelf life of their inventory and the lag time involved. They tend to go heavier on the production than they perhaps should, and then have to unload a lot of inventory at a steeper discount than would be ideal for their business model. At least some of this is smoke and mirrors, inflating the price and then being able to offer what at least appear to be bigger discounts, but all this discounting does inflict actual pain on them as well, as we can see from looking at their profits.

Ford is simply a terrible stock all-around, and while GM stock may not be anywhere near as bad, it still performs below average and certainly does not have the growth potential that many other big stocks have. Given that we do get to choose, having either of these in our portfolio may not make a lot of sense right now, especially given that things don’t look so great for them going forward.