Will a Slowing U.S. Auto Market Clobber Ford Motor Company?

U.S. auto sales may be peaking, and that won't be good for Ford's share price.

Sep 3, 2014 at 10:23AM

Images

Ford's share of the pickup market has declined this year, a result of constrained supplies as the automaker switches its factories over to the all-new 2015 F-150, shown above. But will a slowing U.S. market limit the success of new Ford products like the F-150? Source: Ford Motor Company.

Has the boom in U.S. auto sales peaked? And if so, is it time for Ford (NYSE:F) investors to worry?

Morgan Stanley's widely followed auto analyst Adam Jonas seems to think the market might well be peaking, if it hasn't already.

In a report last month, Jonas said it was becoming "increasingly difficult" for automakers to deliver sales growth "despite ideal credit conditions and higher incentive spending."

Credit conditions have certainly been pretty close to "ideal" for new-car sales. Many buyers have access to low-interest loans with extended terms -- 72 months has become common -- that make monthly payments more affordable. 

But growth in new-vehicle sales has slowed this year, even though credit remains affordable and widely available. Edmunds predicts that Ford's sales will actually decline 1.3% in August from year-ago totals, while the overall U.S. market will rise just 0.7% on the month. 

However, does all of this mean a decline is in store? Is it time to start worrying about Ford and the other automakers that have done so well in the U.S. in recent years?

Can the market really go much higher from here?
Here's one reason to think the U.S. auto market doesn't have a lot of growth left: It's approaching the peaks we saw last decade.

Us Light Vehicle Sales

Source: Automotive News (historical figures), Edmunds (2014 estimate).

Edmunds estimates that U.S. light-vehicle sales will total about 16.4 million this year. That's not far off last decade's peak of just under 17 million, reached in 2005. 

It's possible, some observers have argued, that 17 million sales a year is the upper limit of what the U.S. market can generate under good economic conditions. Americans simply don't need more new cars and trucks than that in any given year, the thinking goes.

So what if the market is approaching a peak? What should we expect to see if automakers must fight harder for sales?

Why a discount war could break out soon
Bigger discounts, for starters.

Historically, when growth has slowed in a market, automakers have resorted to steeper "incentives," the cash-back discounts and cheap-financing deals we all see advertised on TV. 

Most automakers won't want to boost incentives. Higher incentives mean slimmer profit margins, and strict discipline around profit margins has been a point of emphasis for managers at most automakers for a while now -- certainly since the financial crisis.

But in the past a few companies resorted to steeper discounts in an attempt to grab market share -- to get sales growth by luring more of the consumers who are willing to buy their products. Or they may increase discounts to reduce rising inventories, as an alternative to cutting production as sales slow.

Either way, a major move to raise incentives by one or two automakers will put pressure on the others to raise their own discounts in an attempt to defend their turf. (This is especially true in high-profit, high-volume market segments such as midsize sedans and pickup trucks, where a small swing in market share can mean a big difference in profits.)

Consumers benefit when this happens, but automakers' profits (and share prices) tend to get squeezed.

So are we seeing bigger discounts in the U.S. market right now? There have been a few limited signs that automakers are more willing to offer deals. For instance, Ford and General Motors (NYSE: GM) both started their end-of-season clearance events earlier than usual this year.

But analysts at TrueCar seem skeptical that there's a major increase in incentive spending happening. They point out that while incentive spending by the automakers may be rising, "average transaction prices" -- the average prices paid by consumers for new vehicles -- have also increased. 

They argue that incentives really haven't been rising much, when viewed as a percentage of average transaction prices. This TrueCar chart makes the point:

August

Source: TrueCar.com.

"[W]e remain upbeat about auto industry sales, segment mix and profitability," TrueCar President John Krafcik said in a statement, while emphasizing that "we continue to keep close tabs on inventories and incentives." 

So if incentives aren't rising all that much -- at least, not yet -- is it really time to worry?

Don't sell your Ford stock yet, but...
I don't think it's time to sell your automaker shares just yet. And to answer the question posed by the headline, while a slowing U.S. market is likely to hurt Ford's stock when it happens, I don't believe Ford or its peers are in danger of seeing their profits and share prices drop in a big way. Not yet, at least.

I'd argue a big decline in U.S. new-vehicle sales won't happen until the U.S. economy takes a significant turn for the worse. 

But I do think that we could be coming to the end of the big auto-sales growth streak seen over the last few years. And that means it's time for investors in Ford, GM, or other automakers that are heavily dependent on the U.S. market -- which is most of them -- to follow TrueCar's lead and start paying close attention to sales growth, incentives, and inventories every month. 

Because the truth is, that decline will happen, sooner or later. 

Ford's profits in North America may well start to erode before a decline happens, if a discount war breaks out. That would almost surely hurt the stock. As you can see from this chart showing pre-tax earnings in each of Ford's business units last quarter, Ford's profits in North America have been carrying the company recently.

Ford Q

One last thought: all Automakers represent cyclical investments. Simply put, they'll make more money during good economic times and get squeezed during recessions. 

Generally speaking, their stock prices tend to fall when their profits shrink, as you'd expect. That can be a buying opportunity for those with a long-term view. But other investors might sell before that happens, when profits seem to be peaking.

As a Ford investor, I think we're not there yet. But it's time to start thinking about it. Stay tuned. 

Warren Buffett's worst automotive nightmare (Hint: It's not slowing new-car sales, and it isn't Tesla Motors!)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to ride this megatrend. Click here to access our exclusive report on this stock.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers