Why Not to Buy the Peak Auto Argument

The United States had a record year for auto sales in 2015, with about 17.5 million vehicles leaving dealer showrooms. It was the industry’s best performance since the Clinton administration. Of that, there is no doubt.

The National Automobile Dealers Association, expects another record year in 2016, with sales hitting 17.7 million. That would mark the industry’s seventh straight year of growth, albeit with an anemic 2% increase. Market watchers at Kelly Blue Book see 2016 sales at between 17.5 million to 18.0 million, while IHS Auto expects the market to hit 18 million units in the next year or two.

Unfortunately, most economists and auto industry analyst don’t think the good times are going to last. Neither does Mike Jackson, the CEO of Auto Nation, the largest operator of car dealerships, who recently was quoted by the USA Today as saying: “The auto industry is cyclical. And anyone who says it’s not is in denial.”

That’s a dire warning indeed. There is even a pithy phrase to describe this existential angst: “Peak Auto.” Though it certainly sounds authoritative, investors should not take it as gospel, given that “peak auto” has never occurred before and may never happen.
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To be sure, it is an appealing argument. Federal regulators are worried that about the 10-year high of subprime loans that have fueled the auto sales boom. China, a key market for automakers, is another concern, as it is for every multinational business. Chinese consumers bought around 6 million vehicles last year, down from about 24 million in the previous year.

There are a few things to keep in mind. First, there is no evidence that the subprime loans in the auto sector are anything like the subprime mortgages that helped send the world economy into the Great Recession. The Chinese economy hasn’t fallen off a cliff either. According to the latest figures released there, growth is at 6.9%, which is more than three times the rate of the United States. IHS auto expects light vehicle sales to surge by as much as 6% in 2016 in China, which is not too shabby. The U.S. auto market also will be bolstered by cheap gasoline, a strengthening job market and low interest rates that make it less expensive for consumers to finance new cars as opposed to used ones.

Shares of General Motors Co. (NYSE: GM) and Ford Motor Co. (F) have both plunged more than 10% over the past year. Fiat Chrysler Automobiles N.V. (NYSE: FCAU) shares have dropped more than 6%. GM is dirt cheap, trading at a multiple of 10.0 and offers a fat yield of 4.8%. Ford is a slightly better value with the same price-to-earnings ratio at a slightly better yield of 5%. Either stock is worth adding to conservative portfolios. Fiat Chrysler isn’t worth the bother.