Are warning lights flashing for auto profits? – CNBC

Posted: Wednesday, February 03, 2016

Indeed, GM raised its 2016 guidance just a few weeks ago. And across the broader industry, the year started off with better-than-expected sales in January.

Despite this momentum, here are three reasons why investors are steering clear of the auto sector.

1. Rising inventories

For those concerned that the economy is slowing down, and that auto plants that have been running hot will build too many vehicles, January’s inventory numbers from some automakers are troubling.

Ford has a 104-day supply, which is slightly above its 10-year historical average of 96 days, according to JPMorgan.

Though Ford called the inventory build normal for this time of year, RBC Capital analyst Joe Spak summarized the concern among investors, writing, “The market will now be on the lookout for possible production cuts. We retain a cautious view.”

2. Higher incentives

Incentives in January jumped 15.6 percent from last year, to an average of $2,992, according to JPMorgan.

So while the money automakers are spending to sell vehicles is down slightly from December, this year-over-year jump in incentives has some investors wondering if the industry will repeat its past mistake of pumping up discounts to prop up sales, thereby hurting profitability.

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