Auto industry faces “Unprecedented Buyer’s Strike”: Morgan Stanley
After five months in a row of year-over-year declines in auto sales, and therefore after five months in a row of sales that fell below already lowered expectations, the big guns on Wall Street are now seeing the writing on the wall, and are trying to come to grips with it.
“A stretched auto consumer, falling used [vehicle] prices, and technological obsolescence of current cars are ingredients for an unprecedented buyer’s strike,” wrote Morgan Stanley’s auto analyst Adam Jonas in a note to clients.
He now sees a “multiyear cyclical decline.” In this environment, he sees an impaired ability by these stretched consumers to buy new vehicles. He sees a declining “willingness of financial institutions to lend as aggressively as in the past.” He’s particularly worried that even the automakers’ captive finance operations – such as Ford Motor Credit, GM Financial, Mercedes-Benz Financial Services, and Toyota Financial Services – which have been doing everything they could to get people into new cars, are at the end of their wits:
Up to this point, we had believed that competitive forces, particularly the ability of the captive finance subs to find new ways to lower the monthly payment and put “money on the hood,” would help extend the US auto volume cycle a few more years to new heights.
But after an eight-year boom, the industry appears “to be hitting a point of diminishing returns where the tactics required to attract the incremental consumer may be putting even more pressure on the second-hand market, leading to adverse conditions for selling new vehicles…”
So not even record incentives, reaching $14,000 for some truck models, have much impact. Those are the “diminishing returns” – when you throw gobs of money at a problem and it doesn’t have much impact.
Lenders, particularly the captives, stepped forward, making loans with very long terms, low and often subsidized interest rates (“0% financing”), sky-high loan-to-value ratios, and leases that gambled on very high residual values that have now gone up in smoke as used vehicle prices are heading south. And much of this even for customers with subprime credit ratings who are now falling behind on their payments in disconcertingly large numbers.
The idea was to get even cash-strapped customers who already spend every dime they make and who are $3,000 upside-down in their trade into that $40,000-vehicle without cash down and without up-front expenses and with the lowest possible monthly payment while generating fat profits for automakers and dealers. The industry has done this for years, pushing sales as far as they could for as long as they could.
Already last year, there were big signs that the boom cycle was beginning to spiral down. Yet, Morgan Stanley’s version of the downturn still cannot shake its optimism entirely. It had been projecting 18.3 million vehicle sales in 2017. That would have meant a 4.2% increase from last year’s 17.55 million total sales. (What were they thinking?!) Now that sales have fallen for five months in a row, and that the goal of 18.3 million vehicle sales has moved ludicrously out of reach even under wildly optimistic scenarios, Morgan Stanley flipped to projecting a 2% decrease, to 17.3 million vehicles.
Theoretically, it could still be possible. Currently, sales are tracking 17.0 million at the Seasonally Adjusted Annual Rate (SAAR). To get to 17.3 million sales by year end would require a sales rate for the rest of the year of 17.5 million every month. Alas, in May, it was 16.7 million, the third month in a row below the 17 million-mark.
How confident is Morgan Stanley in that 17.3-million sales forecast? “It could be worse,” Jonas concedes.
So he lowered the price targets for 15 companies in the industry, including component makers, after their shares have already gotten crushed for a long time. Just look at Ford, whose shares are down about 40% over the past three years and 16% over the past six months. But those downgrades added some more fuel to the ongoing #Carmageddon selloff.
Over the longer term, Jonas gets outright bearish – and with good reason. He expects a slump that will last years. For 2018, he cut his previous estimate of 18.9 million down to 16.4 million, which may still be high. And for 2019 and 2020, he slashed his estimate to 15 million sales.
That would represent a 15% industry-wide sales decline from 2016. But he notes that to maintain sales even at that low level, the government would have to step in and subsidize in some way new car purchases.
Already praying for the next cash-for-clunkers program? Wall Street and automakers just loved that program even though it took a whole generation of affordable and still decent cars off the road, at the expense of taxpayers and of people who needed those cars the most. It never ceases to amaze me how Wall Street is thinking.
But it’s really tough out there for automakers. Read… Haunting Photos of #Carmageddon: Hyundai Gets Crushed, as GM, Ford, Others Struggle