US Automakers’ Shares set for Rise

31 May 2015 | Author: | No comments yet »

Car sales at the peak: Ford and GM are about to make a big comeback.

NEW YORK: Shares of US automakers may finally be able to accelerate.Investors are closely awaiting next week’s May sales data, expected to come in near record levels. Meeting those forecasts could be enough to lift the sector – among the cheapest in the market – putting the sting of product recalls and tepid recent growth in the rear view mirror.Number-crunchers are paying close attention to the automotive space, as “Big Three” American automakers Ford Motor (NYSE: F), General Motors Co. (NYSE: GM), and Fiat Chrysler Automobiles (NYSE: FCAU) are set to announce May sales statistics next week.

Investors currently keep a close watch over automotive industry, since Wall Street has high expectations of it and two of its major players – General Motors and Ford. Estimated sales of 1.6 million new cars and trucks in May would make for a seasonally-adjusted annual rate of 17.4 million vehicles, according to Edmunds.com, a car buying platform. “This is going to be one of the best months ever,” said David Kudla, chief investment strategist of Mainstay Capital Management in Grand Blanc, Michigan. And while April was a tepid month, May could represent a big comeback, thanks to lower gasoline prices driving demand for trucks and sports utility vehicles, both of which cost more and generate larger profit margins. His forecasted May statistics include sales hitting $40 billion, which is close to the record of $40.3 billion set in August 2014, while he also noted that the average age of cars in the U.S. is between ten and eleven years. Another variable that may contribute to better sales in May is the recently concluded Memorial Day weekend. “Because there was a full week of May after the holiday weekend, shoppers had plenty of time to take advantage of the deals being widely communicated in dealer and automaker marketing messages,” posited Edmunds senior analyst Jessica Caldwell.

A major reason may be that lower gas prices encourage people to buy sport utility vehicles (SUVs) and trucks, automobiles that are more expensive and have better margins. Regarding the used car market, Caldwell cited one key driver for lower prices – a large number of post-lease vehicles returned, and getting sold as used cars. “There’s no sign that this surge in leasing will slow down anytime soon, so shoppers can continue to expect prices of these cars to stay relatively low as they continue to flood the secondhand market in the coming months and years,” she noted. Jack Ablin, chief investment officer at BMO Private Bank in Chicago, said credit for auto loans has seen expansion, which is helping the sector to grow. At the close of trading yesterday, GM was trading at $35.97, a decline of 1.15 percent, while Ford’s share prices were at $15.17, down 0.78 percent from the day prior. David proudly stated that the car sales have reached this level despite the fact that average car age in America is estimated to be about ten to eleven years.

Analysts also base their expectations of a strong rebound on an increasing demand of new cars since many owners hadn’t changed their old vehicles since the beginning of the financial crisis. Caldwell added that a headwind was created by the strong dollar, and GM had to announce recalls from some high-profile products, but the current trend of rise in auto sales is not going to upset soon.

GM is the fourth-cheapest stock in the S&P by this metric, with StarMine estimating that shares should trade at USD 81.69, more than twice its Thursday closing price of USD 36.39. If the sales statistics of automotive products come according to the expectations then the auto stocks could rally but this change could compel the U.S Federal Reserve to raise the interest rates more early then the planned schedule.

Edmunds.com recently stated that this year’s Memorial Day may have helped as well the boost in sales because potential buyers had a longer vacation to ponder on their options in buying a new car. I believe the stock market would sell off (on strong auto data) because it would shorten that timeline,” said Battle who expects a rate hike in the fall.

Most analysts expect the first rate hike to come later this year, but opinions are split on whether it will occur in September or December. “Good data would make the Fed raise rates sooner. Although Ford stock slipped 1.7 percent this year, GM experienced a 3 percent rise mainly due to a $5 billion buyback plan the company had announced a couple of months ago.

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