Wall Street Weekahead: Strong sales could shift Ford, GM to higher gear

31 May 2015 | Author: | No comments yet »

Good news: strong sales mean US car makers are set to accelerate.

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. 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.

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. Car buying platform Edmunds.com stated that a seasonal-adjusted rate of 17.4 million is expected to match the estimated sales of 1.6 million new cars and trucks in May. Chief investment strategist David Kudla of Mainstay Management in Grand Blanc, Michigan stated that the May sales is getting closer to $40 billion, and added that May 2015 appears to become one of the best months ever.

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. Albin goes on to say, “The strong dollar created a headwind, and GM had some high-profile product recalls, but given current trends, I would expect sales growth to continue.” Finally, experts state, “Good data would make the Fed raise rates sooner. 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. Senior analyst at Edmunds.com in Santa Monica Jessica Caldwell said that the timing of the Memorial Day holiday was another big factor in the jump in the car sales. 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.

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. 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. GM is the fourth-cheapest stock in the S&P by this metric, with StarMine estimating that shares should trade at $81.69, more than twice its Thursday closing price of $36.39.

Though the rise in shares caused by the sales is expected, it could be a bad new for the wider market as any sign of consumer strength could push the US Federal Reserve to raise the interest rates. 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. 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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