Wall Street analysts are predicting US auto sales are doomed — but they couldn’t be more wrong – Business Insider

Posted: Saturday, June 17, 2017


car dealership
Keep
on selling.


Reuters


•The US auto market could decline, but the fall won’t be
devastating.

•The industry is heading into a predictable cyclical
downturn.

•Analysts are overstating the potential damage to fuel a
thesis about high-tech disruption.

Barring a sales surge through the second half of 2017, it looks
now as if the US market will only match, not beat, its record
sales pace from the past two record years.

That means something like 17 million-17.5 million new cars and
trucks could roll off dealer lots. The final tally could be
higher, and it could be lower. But in any case, when the year is
in the books, it will have been yet another very good year.

Don’t tell that to a lot of analysts, however, both professional
and amateur. After missing the sales boom on the past two years
and serially downgrading their expectations for traditionally
automaker stocks while sending speculative investments on
profitless Tesla in the stratosphere, they’ve now lined up to
foretell the vast disruption that ride-sharing will bring the
business.

At Seeking Alpha,
Max Greve offers this point of view
, keying off a bearish
research note from Morgan Stanley analyst Adam Jonas concerning
the outlook for US car sales:

[A]ccording to Jonas … [t]he 2018 numbers were slashed
2.5 million units to 16.4 million. And Jonas is projecting 2019
and 2020 to be at just 15 million units per year, a
shockingly low number that represents a nearly 20% contraction
of the market
. Jonas cut price targets on 15
automotive companies, including Ford which saw its price target
cut by double-digit percentage points.

As the final burst of chill wind, Jonas also warns that his 15
million figure will only be maintained in future years if the
government creates new incentives to encourage car purchases, a
tactic last used during the depths of the Great Recession.

The jury is out on whether there’s political will to undertake a
new “cash for clunkers” program. But Greve’s take on a sales
downturn is comically inexperienced. If it takes two-to-three
years for the US market to decline from a 17-million-plus pace to
a “replacement rate” of 15 million, that would be a very slow and
soft landing. It’s also worth noting that after the financial
crisis, the US auto industry rejiggered itself to be able
to break even in a market that drops to 10 million to 11
million in annual sales.


US Auto Sales GraphicBusiness
Insider

A replacement-rate pace isn’t a shockingly low number. It would
be a relatively normal adjustment, and probably somewhat overdue
by 2020, after almost a decade of robustly elevated sales.

Supporting a tech investment thesis

All this talk about catastrophe and the future of US car sales is
being offered by necessity to support an investment thesis around
Uber and Lyft. Greve calls these companies a “fundamental
threat” to the traditional auto industry, but it’s unclear why
that threat would be fundamental, or even really a threat.

The analysis presumes lower vehicle sales because of a
rising de-ownership trend, and to that Greve adds the idea that
people who don’t own cars will be willing to pool their
ridership, essentially sharing Uber/Lyft as taxis. Of course,
nobody does that now, and few people have ever been willing to go
gladly into pooled ridership. When you want to go from point A to
point B, you don’t want to make extra stops at points C and D,
and you’re willing to pay for the privilege of a single
ride.

Beyond that, it’s worth noting that Uber and Lyft need
somebody to build cars for their drivers. 

The US auto market has been hot for a while and is about
ready to flatten ahead of a typical, cyclical downturn. That’s
business as usual, regardless of the effect
that ride-hailing startups will ultimately have. It’s
certainly fair to call this “peak auto,” as plenty of analysts
have.

No structural change


Cadillac Escalade 2015
Big SUVs have thrived during the sales
boom.

Cadillac

But it doesn’t make much sense to start addressing it as a
fundamental structural change in the market. Auto sales go
up. Auto sales go down. This has been the pattern for decades.
The entire industry has seen this movie many times and isn’t even
remotely panicking, especially because of the prevailing sales
mix of pickups and SUVs, which are very profitable.

What’s actually happening here is a sort of infection. Prior to
the financial crisis, and after the dot-com bust, the US market
bounced around a 15 million-17 million annual sales pace for
about a decade, with periodic spikes well above that. Automakers
gained and lost market share and piled up cash when sales were
good. In some cases they took on too much debt and at times they
paid out dividends on their shares.

The whole concept of “disruption” was quite sluggish back then,
as only mainline computer and software companies made it through
the dot-com meltdown and newer firms such as Amazon and Google
hadn’t yet exploded. Facebook didn’t exist for most of it. 

Investing in those companies was a magnificent growth
opportunity, but it’s possible that the wind has gone out of that
storm. A new wave of high-growth tech investing needs to come
along, as the transportation sector has been identified as
appealing, due to its size (trillions of dollars globally) and
relatively boring narrative: make cars, sell cars, repeat. 

Shoving aside tradition


Uber driver car logo
Uber still needs somebody
to make cars.

Robert
Galbraith/Reuters


The traditional industry needs to be shoved aside for this story
to work, hence the idea that a completely predictable,
run-of-the-mill downturn would be the end of the car business as
we know it. But for General Motors and Chrysler to enter
bankruptcy in 2009, the US market had to tank to 10
million
, with a credit implosion to go along with it. 

A slide to 15 million would have been no problem. It’s also
useful to consider that the displacement of the old reliable auto
business model, with a fleet of over 250 million vehicles on US
roads alone, would be asking for major trouble. It would be
difficult for any single automaker, much less a new entrant from
the tech sector, to add enough manufacturing capacity to fully
service demand, even at lower levels.

To be honest, we should be more worried about the sketchy
prospects of some or the more vaunted transportation disruptors.
Tesla, for example, doesn’t have enough cash to ride out a year,
given its ambitions. And Uber is undergoing a major management
crisis that has sent CEO Travis Kalanick on an unplanned
vacation, placing doubt in the company’s $70-billion
valuation. 

Lyft could be in pretty good shape largely because it has GM as
an investor — insulation from a traditional carmaker with a solid
balance sheet.

The bottom line is that the peak auto gloom-and-doom is being
overstated because analysts lack a sensible historic framework
for the difference between a booming US market and a merely
stable one. Their real fear isn’t that the GMs and Fords and
Toyotas won’t make it — it’s that their exciting new investment
ideas will prove to be unfounded.

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