Auto Storm Brewing
An eerie calm seems to have beset auto shares today. It's a kind of calm before the storm, and the type of storm that could shake the market's confidence in consumer strength to its very core. On Friday, a high level sales executive at Ford Motors (F) confirmed what executives at General Motors (GM) have been warning of for several weeks. It seems April auto sales have fallen off of a cliff, and tomorrow, they will be reported.
George Pipas, Ford's Chief Sales Analyst, was quoted in a CNN Money article as saying that sales were down approximately 10% in April. Pipas said, "We're not even close to where we expected to be in April." Now, it seems likely that weather played a role in the weakness, with April measuring as one of the coldest in forever. Still, what troubles us is the implication that auto industry weakness may be providing about the overall state of consumer spending strength. Also, the weakness may portend later discovery that auto sales, like home sales, had also been boosted by less than critical lending standards, and this could uncover some skeletons within auto lending.
There are an awful lot of factors in play that are pressuring the pockets of the American consumer these days. Adjustable rate mortgages are repricing, raising the monthly mortgage payments due for consumers who may have purchased homes that it turns out they could not afford. Meanwhile, gasoline expenditures, a common expense for Americans, are increasing as refinery constraints limit production heading into the peak demand summer driving season. If that weren't enough, food prices are rising as well, another regular expense for all Americans. While all these costs are rising, credit availability is likely decreasing, making it difficult for the American consumer to keep up his spending ways.
When I set out to write this article, it was going to be a piece dedicated to helping you find the best investments in the auto and related sector. However, in light of the news pending for tomorrow, and my view that the market will draw a broad conclusion from it about the state of consumer health, I am taking a negative position on the entire sector for now. Ford (F) ran up last week on a narrower than expected loss, and the shares benefited until Friday's story caught some eyes. General Motors (GM) reports later this week, but that report could prove meaningless depending on April's results. Ford trades at about a tenth of trailing twelve months sales and about 4.9X operating cash flow. General Motors (GM) compares with a price-to-sales ratio of 0.09. In an environment that could be deteriorating over the near term, I wouldn't look to either of these for share strength. Toyota (TM), which is now the top player in the world based on sales, trades at 1.19X sales and boasts positive earnings with a P/E of 12.9X forward 12 month earnings. With growth estimated at nearly 10%, the stock may become attractive on any overall industry weakness reported tomorrow.
One stock I definitely like on weakness is DaimlerChrysler AG (DCX). The shares have been on a tear since the market became aware that Chrysler was for sale, and with plenty of private equity out there to bid the price up, it seems Daimler will benefit. The shares aren't cheap anymore though, as a result, trading at 21X '07 estimates. We would avoid the shares of Magna International (MGA), which reportedly has emerged as a front runner to acquire Chrysler. We expect Magna could lose business with other highly competitive automobile manufacturers should it acquire a stake in Chrysler. We would view signs that Magna might be falling out of the race as positive for the shares' long-term outlook.
So, net net, I think the best bet for the short term is a short position on the weakest players in autos, with a focus on Ford and GM. With GM's earnings report just days away, I wouldn't fall in love with the position. A trade is a trade, and if the data doesn't move the stocks, I would move my investment elsewhere no matter. Also, a short on Magna seems okay for a longer duration, since the shares have benefited from its pursuit of Chrysler, something we view as a negative for the value of MGA's ongoing operations. Depending on the impact, if any, we might use the weakness as a second opportunity to own DCX ahead of the sale.
Remember though, the most important take-away from tomorrow's likely auto sales weakness is that the pillar of strength holding the American economy may finally be cracking. Last week's GDP data, combined with today's personal consumption weakness and tomorrow's auto sales slump, may portend a tightening of the consumer wallet. Wall Street Greek predicts this will drive the American economy into recession this year. It's a ballsy prediction, the kind you only get from a true independent equity research provider, and one that is not afraid to stick its neck out for what it sees, no matter who else views it that way. We expect the market to begin acting like a recession is possible, and with the Fed handcuffed by persistent inflation, we expect that reaction to drive shares lower.
Full Disclosure: We plan to take a short position in Ford today, but may not depending on price. We plan to reverse that position tomorrow, but may decide not to depending on circumstances. To receive our reports via email, click here and provide us with your email address. We respect your privacy and will never share your information with any third party. (disclosure)
George Pipas, Ford's Chief Sales Analyst, was quoted in a CNN Money article as saying that sales were down approximately 10% in April. Pipas said, "We're not even close to where we expected to be in April." Now, it seems likely that weather played a role in the weakness, with April measuring as one of the coldest in forever. Still, what troubles us is the implication that auto industry weakness may be providing about the overall state of consumer spending strength. Also, the weakness may portend later discovery that auto sales, like home sales, had also been boosted by less than critical lending standards, and this could uncover some skeletons within auto lending.
There are an awful lot of factors in play that are pressuring the pockets of the American consumer these days. Adjustable rate mortgages are repricing, raising the monthly mortgage payments due for consumers who may have purchased homes that it turns out they could not afford. Meanwhile, gasoline expenditures, a common expense for Americans, are increasing as refinery constraints limit production heading into the peak demand summer driving season. If that weren't enough, food prices are rising as well, another regular expense for all Americans. While all these costs are rising, credit availability is likely decreasing, making it difficult for the American consumer to keep up his spending ways.
When I set out to write this article, it was going to be a piece dedicated to helping you find the best investments in the auto and related sector. However, in light of the news pending for tomorrow, and my view that the market will draw a broad conclusion from it about the state of consumer health, I am taking a negative position on the entire sector for now. Ford (F) ran up last week on a narrower than expected loss, and the shares benefited until Friday's story caught some eyes. General Motors (GM) reports later this week, but that report could prove meaningless depending on April's results. Ford trades at about a tenth of trailing twelve months sales and about 4.9X operating cash flow. General Motors (GM) compares with a price-to-sales ratio of 0.09. In an environment that could be deteriorating over the near term, I wouldn't look to either of these for share strength. Toyota (TM), which is now the top player in the world based on sales, trades at 1.19X sales and boasts positive earnings with a P/E of 12.9X forward 12 month earnings. With growth estimated at nearly 10%, the stock may become attractive on any overall industry weakness reported tomorrow.
One stock I definitely like on weakness is DaimlerChrysler AG (DCX). The shares have been on a tear since the market became aware that Chrysler was for sale, and with plenty of private equity out there to bid the price up, it seems Daimler will benefit. The shares aren't cheap anymore though, as a result, trading at 21X '07 estimates. We would avoid the shares of Magna International (MGA), which reportedly has emerged as a front runner to acquire Chrysler. We expect Magna could lose business with other highly competitive automobile manufacturers should it acquire a stake in Chrysler. We would view signs that Magna might be falling out of the race as positive for the shares' long-term outlook.
So, net net, I think the best bet for the short term is a short position on the weakest players in autos, with a focus on Ford and GM. With GM's earnings report just days away, I wouldn't fall in love with the position. A trade is a trade, and if the data doesn't move the stocks, I would move my investment elsewhere no matter. Also, a short on Magna seems okay for a longer duration, since the shares have benefited from its pursuit of Chrysler, something we view as a negative for the value of MGA's ongoing operations. Depending on the impact, if any, we might use the weakness as a second opportunity to own DCX ahead of the sale.
Remember though, the most important take-away from tomorrow's likely auto sales weakness is that the pillar of strength holding the American economy may finally be cracking. Last week's GDP data, combined with today's personal consumption weakness and tomorrow's auto sales slump, may portend a tightening of the consumer wallet. Wall Street Greek predicts this will drive the American economy into recession this year. It's a ballsy prediction, the kind you only get from a true independent equity research provider, and one that is not afraid to stick its neck out for what it sees, no matter who else views it that way. We expect the market to begin acting like a recession is possible, and with the Fed handcuffed by persistent inflation, we expect that reaction to drive shares lower.
Full Disclosure: We plan to take a short position in Ford today, but may not depending on price. We plan to reverse that position tomorrow, but may decide not to depending on circumstances. To receive our reports via email, click here and provide us with your email address. We respect your privacy and will never share your information with any third party. (disclosure)
posted by The Greek | 12:08 PM
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