Toyota, the largest carmaker in the world by number of vehicles sold, made it to June 30 relatively unscathed, with shares down just 10.6%. Meanwhile, GM and Ford were walloped by the stock market, with shares down 30.9% and 34.6%, respectively, over the same time frame.
All three automakers underperformed the S&P 500's 4% decline during that period.
The first half of 2020 was practically tailor-made to hurt auto manufacturers, particularly those with a big presence in the U.S.
Even before the coronavirus was declared a global pandemic, the auto industry looked to be in trouble. Shutdowns in China, the first country to experience a COVID-19 epidemic, essentially shuttered an already-slowing Chinese auto market as well as auto manufacturing operations in the country. Considering that China has the largest auto market in the world, its 80% drop in February sales was concerning for investors in automotive companies. It was a canary in the coal mine for the global auto industry.
In mid-March, things really began to fall apart for the automakers. First, the coronavirus spread to Europe, causing all three companies to shut down their European manufacturing operations. Only a few days later, with COVID-19 escalating in the U.S., they also closed their North American plants under pressure from unions.
Besides causing operational headaches, the shuttering of factories triggered a series of financial issues. Automakers record sales of vehicles when they're delivered to customers, meaning that the factory shutdowns abruptly robbed the companies of revenue. With no revenue coming in, Ford and GM had to take immediate and drastic steps to free up cash to pay parts suppliers and employees.
Right away, Ford suspended its dividend and drew heavily on its credit lines, resulting in a nearly immediate downgrading of its credit rating to junk status. GM joined Ford in implementing pay cuts and issuing bonds but managed to hold out until late April before suspending its own dividend. Toyota, on the other hand, has neither cut nor suspended its dividend, which may have factored into its relative outperformance.
And, of course, it goes without saying that all three automakers' North American sales plummeted. With the unemployment rate rising and the U.S. tipping into recession, many consumers put off making big-ticket purchases like cars and SUVs. Meanwhile, stay-at-home orders not only prevented people from heading to the dealerships to begin the process of buying a car but also reduced demand for cars as people no longer had to commute.
Things may be starting to return to normal for the automakers. Chinese auto sales for all three automakers have rebounded as the Middle Kingdom has gotten a handle on the coronavirus. U.S. auto plants began to reopen in May, with global production ramping back up in many regions.
However, the recovery isn't a done deal just yet. Coronavirus cases are continuing to rise in most U.S. states, and some have even had to scale back or reverse their reopening plans to try to prevent the spread of the illness. U.S. unemployment is still above 10%, and while global demand for vehicles has improved from March and April, it's still down year over year and isn't expected to fully recover until at least 2021.
All three companies are trading below book value at this point, so there's an argument to be made that now's the time to buy. And indeed, if a swift economic recovery occurs, the automakers should benefit. But that's a big "if." A slower recovery would likely bring continued underperformance and perhaps even further cash crunches. With their dividends suspended, GM and Ford may not be worth the wait. Risk-averse investors will probably want to look elsewhere.