BIZ-AUTO-SALES-GET

A man inspects Toyota cars on display at Melody Toyota in San Bruno, Calif.

New vehicles are piling up on U.S. car dealer lots, creating concern just as sales are expected to sputter.

The inventory of unsold new cars on dealer lots rose 2.1 percent last month, setting an all-time February high, a top industry analyst said in a research note last week.

That total of 4 million new vehicles in U.S. stock is a 21-month high, Morgan Stanley’s equity analyst Adam Jonas wrote. In dollar terms, it’s about $140 billion in inventory, he wrote.

That and other economic concerns have analysts worried the second half of this year won’t be as good for carmakers as had been hoped.

“The rising inventory despite stalling sales trend is of particular concern to us given market expectations of a significant second-half … recovery in earnings for many of our U.S. names,” Jonas wrote.

Impact on Detroit 3

The slowing sales and high inventory will affect General Motors, Ford and Fiat Chrysler Automobiles in different ways.

Jonas said GM exhibits likely the strongest in a first- to second-half earnings growth, with minus 15 percent earnings per share shifting to plus 14 percent.

Jonas thinks Ford’s earnings per share will move from minus 20 percent compared with last year in the first half to up 7 percent in the second half.

But Jonas warned, “(Fiat Chrysler’s) second-half earnings per share (is expected) to fall 18 percent year over year, growing 6 percent year-over-year in the first half.”

Jonas said his Detroit 3 forecasts depends on profits in China, the world’s largest car market, recovering and improving from a weak 2018.

Jon Gabrielsen, an economist and consultant to the auto industry, offered a contrary view. He noted that GM and Ford have been continuously losing market share for at least a decade, whereas “(Fiat Chrysler) has been gaining market share for the same period.”

Other economists said that if President Trump enacts tariffs, that could lead to higher new car prices, killing consumer appetite and inflating stock on lots to even greater levels.

“February could be one of the last really strong months of the year because there are other headwinds facing us,” said Jonathan Smoke, chief economist for Cox Automotive.

It wasn’t that great a month. February sales were off 2.8 percent from 2018, Jonas wrote, and are down 2.4 percent year to date. Americans are buying lightly used vehicles coming off leases or are opting to keep their vehicles longer because quality and durability have improved.

Job loss, price hikes

Besides slowing sales, uncertainty hangs over the industry.

The Trump administration dealt automakers a wild card last month by deciding not to reveal the Commerce Department’s recommendations on whether to apply new tariffs on imported vehicles and components, based on a declaration that imported vehicles harm national security.

“The situation keeps evolving, and we’re studying it,” said GM spokesman Jim Cain. “Obviously, it’s a concern.”

Broad tariffs and trade restrictions could cost 366,000 jobs — nearly 100 times what’s at risk in GM’s controversial idling of five plants in North America this year, according to a new study by the Center for Automotive Research. The tariffs and trade restrictions also could increase average vehicle cost by $2,750 and reduce U.S. sales by 1.3 million vehicles a year, the study said.

‘Another good year’

GM’s Cain said U.S. car sales might slow down, but GM has several “tailwinds including the fact that we’re at full production for the 2019 Chevrolet Silverado and GMC Sierra light-duty pickups, and the heavy-duty versions come out in the second half.”

He said GM also is launching the new 2019 Chevrolet Blazer SUV and has been selling the new Cadillac XT4 SUV since late last year. Midyear, Cadillac will roll out the new XT6 three-row SUV.

“So we’ve got brand-new products in the growth parts of the market,” Cain said. “But even in a slowing market, you still have a strong economy with high employment, good interest rates, oil prices and availability is good, so when you net everything together, it should be another good year for the industry and for GM.”

In early February, GM CFO Dhivya Suryadevara told investors the company expects a strong earnings per share in the range of $6.50 to $7 and adjusted automotive free cash flow in the range of $4.5 billion to $6 billion. But, she said, “We expect to see headwinds year-over-year from commodities and tariffs to the tune of $1 billion.”

Ford restructures

In a Feb. 19 Morgan Stanley research note, Jonas wrote that Ford stock remains volatile as the company restructures.

Ford said it will take a $460 million charge to exit its heavy truck business in South America. It will still sell SUVs and light-duty trucks there.

“Ford is one of the most out-of-favor names in an unloved auto sector, contributing to its relatively strong rebound in share price year-to-date,” Jonas said. “We believe investors can anticipate a range of further actions required to address structural inefficiencies throughout the company’s international operations (particularly in Europe, and to a lesser extent Asia) as well as areas of optimization in North America.”

Jonas said many investors are waiting for clearer signs of a bottom, “such as potential credit ratings downgrades or a potential cut in the dividend payment before considering fresh investment in the shares.”

Ford won’t comment on expected sales or provide financial guidance, a spokesman said. But the automaker will replace three-quarters of its U.S. lineup, including the highly profitable and popular Escape and Explorer SUVs and F-150 pickup, by the end of next year.

Ford’s average day supply of vehicles is 93 days, up slightly from last year’s 89 days at this time last year. But that’s because Ford is preparing to change over its two high-volume SUVs, the Escape and Explorer, to the redesigned models which go on sale later this summer.

Fiat Chrysler’s fate

A Fiat Chrysler spokesman declined to comment on how well-positioned the carmaker is to ride out a downturn in new car sales.

But in January at the Detroit auto show, FCA CEO Mike Manley said the company came out of its bankruptcy in 2009 having thinned down its management team and reduced the overall workforce. He said that approach has helped FCA improve profit margins consistently over the last few years leaving it in good shape today.

“We finished 2018 in the strongest position that we have been in both from a balance sheet perspective, even without the completion of the Magneti deal, but that will be even stronger when that happens,” Manley said.

Fiat Chrysler has secured a deal to sell the company’s Magneti Marelli components business for more than $7 billion, a move that will provide significant cash at a critical time for FCA as it ramps up its electrification and self-driving technology efforts.

Like GM and Ford, Fiat Chrysler has new vehicles hitting the market that might provide some “tailwinds” to offset the predicted headwinds. One is the new Jeep Gladiator SUV due out in the second quarter. The company is currently rolling out a redesigned Ram heavy duty pickup.

“We expect full year-over-year operating performance to exceed our record results in 2018,” Manley said during the fourth-quarter earnings call. “In the second half of the year, NAFTA will benefit from the all-new Jeep Gladiator and Ram heavy-duty, along with more actions to improve margins with industrial efficiencies.”