16th May 2016
Fears that US auto industry sales are poised to collapse after several quarters of stellar growth are wide of the mark, says Grace Le, investment manager in the fixed income team at Kames Capital.
The fund manager points out that the US auto industry’s seasonally adjusted annual sales, as of April 2016, are estimated to reach nearly 17.3 million for the whole of 2016, following a 2015 in which sales hit 17.4 million units against a three-decade low of 10.4 million in 2008/2009.
While such growth has created a ‘this is as good as it gets’ feeling about the sector, Le says there are many more reasons for quiet optimism than the more bearish commentators have suggested.
“Those who have been waiting for the cycle to turn are missing the bigger picture,” she says. “Although growth will not be as impressive as it has been over the last few quarters, it is our belief that sales and their value will not collapse. Rather, we believe that sales will moderate and SAAR (the Seasonally Adjusted Annual Rate) are likely to ‘plateau’.”
Both General Motors and Ford, the two major US manufacturers, have posted first quarter figures that underpin this view, says Le, who suggests there are other fundamental factors at play.
“It is important to remember that the macroeconomic picture is still supportive of the US auto sector,” she says. “High US employment data, cheap oil prices and cheap financing remain favourable. Meanwhile the high average age of cars on the road needing replacement makes a powerful case for remaining optimistic about the industry’s outlook. It is also worth remembering that US auto companies have come a long way, becoming leaner and more efficient since the collapse of 2008/9.”
Another reason to be constructive on the sector is the mix of US sales growth. Growth in sports utility vehicles has, for instance, outstripped the less profitable traditional car segment, which Le says is particularly supportive of US manufacturers, which dominate the SUV market.
She says: “Ford and GM are not as reliant on US sales as before the start of the financial crisis and have increased their exposure to both Europe and China. Growth in these markets should help Ford and GM in the event of a slowdown in the US. More to the point, it is worth noting that GM is finally managing to break even in Europe after 15 loss-making years. Underscoring all this is the fact that both GM and Ford are profiting from increases in their Chinese sales whilst generating better profit margins.”
Despite continued nervousness around regulations following the NOx emissions scandals, Le says GM and Ford remain preferred sources of corporate bonds. “Given the market outlook, both firms’ strong financial results and cash flow generation, we continue to expect them to outperform,” she says.