By Justin Spittler, editor, Casey Daily Dispatch
Ford is in free fall.
Last Tuesday, Ford’s stock plunged 4.4%.
The second-biggest U.S. carmaker is now down 12% since mid-March. And it’s trading at its lowest level since 2012.
That same day, General Motors fell 2.9%. GM, the largest U.S. carmaker, is now down 11% since March. It’s trading at its lowest level since November.
Both stocks tanked after reporting huge declines in sales.
GM’s sales fell 5.8% in April. Ford’s plummeted 7%.
Now, you might not be worried about this if you don’t own GM or Ford. But you have to understand something…
• The entire U.S. auto industry is unraveling…
Toyota’s U.S. sales fell 4.4% last month. Fiat Chrysler’s fell 7%. Honda’s U.S. sales also fell 7%.
As a whole, auto industry sales declined 4.7%. April was the fourth straight month that auto industry sales have declined. That hasn't happened since 2009.
Investors aren’t used to seeing this. After all, U.S. auto sales have climbed for seven straight years. Last year, the industry sold a record 17.55 million vehicles.
However, you could have seen this coming had you been reading the Dispatch.
• After all, we’ve been pointing out problems in the auto industry for over a year…
In March, I said that GM was flashing major warning signs.
A month later, I said the auto industry had peaked. I had the proof to back it up, too.
Not only that, I urged investors to get out of GM and Ford immediately.
If you took my advice, good for you. You’re in a much better position than most investors.
If you still own car stocks, you need to take this warning seriously. As you’re about to see, the auto industry hasn’t just hit a rough patch. It’s in the early innings of a major crisis.
I’ll explain why in today’s essay. I’ll even show you how to protect yourself from what’s coming. But let’s first look at why the auto industry’s problems are about to go from bad to worse.
• Auto inventories are piling high…
Just look at the chart below.
It shows the industry’s inventory-to-sales ratio. This key ratio compares the number of cars sitting on lots with the number of cars that dealers have sold.
When the ratio is falling, it means dealers are working through their inventories and sales are up. When it’s rising, it means dealers are struggling to sell cars.
This ratio has surged higher over the last few months. It’s now at its highest level since the 2008–2009 financial crisis.
This is going to create big problems for car companies.
Building cars is a major operating cost. Because of this, companies that can’t move their inventory end up losing a lot of money.
Just look at what’s happened to Ford.
Last spring, it was building more cars than it could sell. Its profits went on to fall four straight quarters. Its share price has plunged 18%.
Now, the same thing is happening to other carmakers.
General Motors, for example, has nearly 1 million vehicles sitting on dealer lots right now. It would take the company more than 100 days to work through that inventory.
• Keep in mind, car companies are cutting production at the fastest rate since 2009…
Industry-wide production is now at the lowest level since 2011.
Not only that, carmakers are doing everything they can to sell cars right now.
They’re offering low-interest loans, discounted leases, and “cash back” offers. According to J.D. Power & Associates, the average new car is selling at a $4,000 discount to its retail price. That’s an all-time high.
But none of this is working.
• Inventories are stacking up at the fastest rate since the last global financial crisis…
Unless this changes, car companies are going to have major problems.
Continue to stay away from companies like GM, Ford, and Fiat Chrysler.
You should also avoid major auto lenders like Ally Financial (ALLY) and Santander Consumer (SC). These companies are heavily exposed to the auto loan market. They’ll take heavy losses if auto sales continue to plunge.
These simple steps will keep you from losing a lot of money as the auto crisis unfolds.
Delray Beach, Florida
May 8, 2017
P.S. Tomorrow, I’ll take a close look at the auto loan market. As you’ll see, this fragile pillar of the credit system is starting to give way.
P.P.S. Casey Report editor E.B. Tucker recently told his readers about a way to profit from the auto crisis. Unlike most “car companies,” this company should actually make more money as auto sales decline. You can learn why by signing up for The Casey Report. Just don’t wait too long. E.B.’s “car stock” is up 12% over the last month.