Auto Sales Are Cause for Optimism

by: Bill Conerly August 05, 2008 | about stocks: GM    

Bill Conerly

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Car sales are in the tank, but I'm optimistic, much more so than I am for housing.  First, here's the recent bad news on automobile sales:
Autos
This is your basic falling-off-a-cliff chart.  What's the reason for optimism?  Take a look at the long-run history:
AutosHist
I normalized car sales for population to compare past decades with recent experience. Observe that this is a cyclical variable. Yep, it sometimes goes down hard. Then it recovers.

Next observe that we HAVE NOT BEEN OVER-BUYING cars like we did houses.  That last spike was in 2000, just before the 2001 recession. In the housing boom years, car sales were pretty stable. (This series shows units sold; the dollars spent is a bit stronger in 2005, as we shifted to more expensive cars/truck/SUVs.)

The auto sales turnaround will not come next month, because there's too much doom and gloom among consumers, some job losses, and difficulty for marginal borrowers to get car loans. But the longer we spend below trend, the more upward pressure there will be on car sales when the economy shows a little bit of strength.

So is this a good time to buy GM (GM)?  I have to say, if it was truly worth $30 a share back in 2007, it looks like a great bargain at $10 today. But here's the rub: I'm not sure it was worth $30 last year. Maybe it was, but I would want to sharpen my pencil on their employee liabilities and their competitive position before buying the stock. I must say (here's a non-expert comment) that they have some good looking cars for a change. If I weren't such a practical, reliability focused buyer, I would abandon the Japanese nameplates for a GM or a Chrysler.

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This article has 8 comments:

  •  
    Aug 05 06:20 AM
    People can sit on the sidelines only for so long. Eventually, their vehicles wear out (the definition of worn out is different for everyone). You can extend the life of your vehicle for a short time, but only a short time. Most people have the type and age of vehicle that fits their lifestyle. Someone who is used to buying a new vehicle every three years may wait four, but not much longer than that. It is extremely difficult to get people to change their spending habits. I agree with Bill Conerly that the outlook is not as bleak as it is made out to be. The only point of disagreement is in the amount of diligence it takes to determine the value of GM stock. Buy the stock at $10; it'll go up. Maybe not to $30, but certainly North of where it is now.
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  •  
    Aug 05 08:05 AM
    while it is true that car sales will return, it does not follow that GM is a buy at these levels. GM will one day be a force to be reckoned with, but not until it goes through a chap 11 to shed all of the legacy obligations that it carries. It will never be competitive until it does so.
    GM is in a sense, a victim of its own success. It has lasted long enough to become responsible for the health care of a million retirees and their families. GM has not funded that obligation, and cannot pay for it over a smaller number of vehicles, and still be profitable. In addition to the health care costs, they have the Delphi obligations, and huge "restructuring&qu... costs which seem to grow monthly. GM should just file chap 11 and move on. They will emerge a strong company once again.
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  •  
    Aug 05 09:19 AM
    Certainly GM would be a stronger company after Chapter 11 but that would be at the expense of all those people who worked for them over the years. The loss of all those pension dollars and medical coverage would hurt them and the US economy.

    It's too bad the US gov't doesn't work to protect its industries (not just auto) like Japan and many other developing countries.

    If GM can survive a few more years without Chapter 11 -- they have some great cars and crossovers now, with more in the pipeline -- and their truck line up with the new hybrids is strong too in case the market picks up -- then there is a bright future. There is the more competitive wage rates that they negotiated with the UAW and at some point. A importantly, their legacy costs will go down as people die and the newer companies like Toyota and Honda are going to start having legacy costs too!
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  •  
    Aug 05 10:11 AM
    I think people didn't overbuy cars like they did houses because people know cars are not an investment-- The car starts depreciating in value the moment you drive it off the dealer's lot. Houses on the other hand were seen as investments and expected to appreciate in value over time.

    Still, what people DID overbuy when it comes to cars is size.. Look at how so many are frantically looking to unload their superhuge gas-guzzling SUVs right now. :-)
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  •  
    Aug 05 10:12 AM
    IMO if GM were to declare any form of bankruptcy in order to shed debt and legacy obligations, they would lose a large fraction of the "loyal" US long term GM purchasers. Many would equate the obligations to the debt holder with the obligations to the purchaser of the car - neither "warranty" is of any value. GM would not be a company that you could trust.

    GM car sales in the US would likely drop by another 30% or so. IMO this is why GM will struggle harder than most companies to avoid bankruptcy. Maybe they will ultimately find it necessary. If they do, they will return as a much smaller company, at least in the USA. I do not believe that the willingness to do that is in their coporate culture gene pool.
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  •  
    Aug 05 11:46 AM
    The problem with this analysis is that it misses the declining peaks. It may be that auto sales NEVER recover to where they were, because the newly-polarized "Bushian" society of the very rich and very poor just won't be able to buy or run so many cars.

    When you drop the wages to the poverty level, don't expect them to be able to buy a car, let alone a luxury car.
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  •  
    Aug 05 12:23 PM
    elroy, I agree that the chap 11 would hurt all the retirees as well as the shareholders and some debt holders. These are macro issues that go to the question of globalization/ unionized work forces/ moral and legal obligations to retirees etc. That debate is far to much for a forum such as this. In fact, the problems at GM go to the root of the problems with globalized trade and the reduction of all forms of trade hurdles.
    The only issue here is....are GM shares a buy at these levels?

    In my view, they are not. GM simply has to many anchors to succeed going forward. Absent huge changes in US trade policy, they will have no choice, in my view, but to eventually file. The longer they wait, the lesser will be their cash available to 'reorganize' with.

    As an aside, I am not sure if the readers here have seen the promotional pieces being touted on CNBC relating to their upcoming piece on GM. Much is being made of the GM success in China, to bad nobody is mentioning that they actually lost money in China last quarter, even thought they sold a lot of cars. In addition, much of their reported "growth" in China is relating to their SAIC joint venture, in which they have a 34% interest, but report 100% of the sales as if they were their own. GM has done very well overseas and particularly in China, and they will continue to do so, but while they make and sell a lot of cars overseas, they do not make a lot of money there, and they will never be able to make up their domestic losses with foreign profits, unless they go through that chap 11 filing.
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  •  
    Aug 05 03:39 PM
    www.bloomberg.com/apps...

    further to this discussion, some of you may want to take a look at this chart to see what the cost of insuring GM debt is today. The debt market clearly expects insolvency.
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