Thursday, September 9, 2010

Marketwatch: Auto Sales Recovery Stalls as Economy Waffles

Housing and auto sales, the 2 cyclical industries that most directly affect the U.S. economy and are the largest consumption decisions in day to day life, have rebounded off the worst levels of 2008 and early 2009 when most Americans were in a cocooned like state.  Yet despite record mortgage rates and affordability in housing, and the return of cheap financing & rebates in the auto market we are not seeing much in terms of momentum.  Yet another sign of the 'square root recovery'.  Put another way, we appear to be stuck at 'green shoot' levels with little follow through or acceleration upward.  I continue to believe the analyst community, centered in NYC, does not understand how much of consumer spending the past half decade+ was driven by the house ATM in America... with people reliant on savings/wages to consumer, rather than easy credit and the magic of house appreciation, do not expect any major recovery for many years.  Due to this lack of savings across the majority of America, the terms of loans in the auto market were reaching 'ridiculous' as we highlighted (to deaf ears at the time) [Sep 17, 2007: Is a 10 Year Car Mortgage Far Off?] Feb 13, 2008: Car Loans Being Stretched to 7 Years 

Specific to the auto sector, is is generally thought that roughly 12M in annual sales is necessary simply to replace old stock as cars go kaput, so seeing annual run rates sub 12M this deep into the 'recovery' is telling.  (at peak of the house ATM, credit bubble auto sales were in excess of 16M, and they dropped below 10M at the worst 2 years ago)   On the positive side, as speculators, we can be happy that the workforces in the industry have been slashed and burned to the point companies are profitable at even 11M annual sales; so if there is even a recovery to 13-14M in sales (whatever year that may be), profits should be prodigious.

Via Marketwatch:

  • Those anticipating and relying on that long-overdue recovery in the U.S. auto industry may have to wait a bit longer.  When the year began, a collective sigh of relief and a hearty good riddance to 2009 echoed from Dearborn to Auburn Hills, Mich.: This year just has to be better, because it can't get any worse. To a certain extent, it's played out that way.
  • There are definitely signs that sales are on the mend, with year-over-year comparisons, August aside, showing some strong improvements. But that isn't exactly a big deal considering the depths of the auto depression last year, and consumers are rightfully feeling a bit jittery in the face of downbeat economic news. Buying a car hasn't been a top priority.
  • Hence, analysts are pushing back their timeline. Most recently, Credit Suisse's Chris Ceraso on Tuesday went from being one of the more bullish forecasters to one of the more bearish, as he slashed his sales outlook for the next three years.
  • "A slower recovery in the labor market, combined with still-falling home prices" led him to slash his 2010 outlook to 11.4 million cars and trucks from 12 million. That's well below the Wall Street consensus of 11.7 million vehicles.>
  • It won't get much better in 2011, according to Ceraso. He projected sales of 12.8 million next year, down from 13.5 million and trailing the consensus of 13.4 million. In 2012, he said he sees sales of 13.8 million, down from his prior target of 14.5 million.
  • J.P. Morgan analyst Kohei Takahashi echoed popular Wall Street sentiment: "We still see no signs of recovery in demand, and therefore think sales are likely to stay in the 11 million to 12 million range for the time being."
  • If August was any indication, indeed, there's still a long way to go.  The seasonally adjusted annual rate of sales (SAAR) came in at 11.47 million vehicles, down from 14.17 million a year ago; though the numbers were skewed because of the buying spree triggered by the government's "cash for clunkers" promotion.
  • Total deliveries fell 5% from July and 21% from a year ago, resulting in the worst August for the industry in 28 years -- a decline that analyst Jesse Toprak described as "an indication that the recovery is going to be much more slower and a painful than we could have predicted."

Also some follow through on the downgrade of the sector by JPMorgan yesterday:

  • In a note to investors, Patel noted recent sales weakness, including a 5 percent drop in U.S. sales between July and August. He is expecting sales in both U.S. and Europe to remain flat from September through the end of this year.
  • Patel predicts full-year U.S. sales of 11.4 million in 2010, down from a previous forecast of 11.5 million. Previously, Patel had forecast 14 million annual sales in both the U.S. and Western Europe in 2012; now, he forecasts only around 12 million for both regions.
  • Rising dealer inventories could also lead to production cuts in both regions. Patel expects North American and European production to drop in 2011 before rising again in 2012.
  • Patel said it may look like he made this call too early, since some of the companies will likely report positive earnings in the third quarter. But he said there is major potential for downside in the next three to six months, especially as companies adjust their guidance to the reality of lower production.
  • Still, Patel said investors with a two- to three-year time frame should continue to consider BorgWarner (BWA), Harman (HAR), Magna (MGA)  and Tenneco (TEN) because of growth prospects in the sector.

Long BorgWarner, Magna International in fund; no personal position

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