What It Means for Auto Investors if the U.S. New-Car Market Is Stalling

By Markets Fool.com

Big sales of loaded F-150 pickups helped push Ford's profits to record levels last quarter. But if the U.S. new-car market is stalling after years of growth, Ford's profit growth could stall as well. Image source: Ford Motor Company.

Continue Reading Below

A new forecast predicts that U.S. auto sales will decline in May. Are we at the end of the industry's long growth cycle?

After years of growth, a sobering forecast

A joint forecast by analysts at J.D. Power and LMC Automotive predicts that sales of "light vehicles" (the industry term for cars, pickups, and SUVs) in the U.S. will total 1,539,500 units in May, down 5.7% from 1,632,354 in May of last year.

To some extent, the analysts say, that drop is due to a quirk of the calendar. The industry counts "selling days" excluding Sundays and holidays, on the assumption that many U.S. auto dealers are closed on those days. May 2016 has two fewer "selling days" than did May of last year. Total vehicle sales were actually up 2% on a "selling-day-adjusted" basis, the analysts said.

But either way, the analysts concede, sales are running behind the forecasts that were made early in 2016. "Given that performance is running just behind expectations, LMC Automotive is reducing its total light-vehicle forecast for 2016 to 17.7 million units from 17.8 million units," the analytics firm said in a statement on Thursday.

Continue Reading Below

That's a point of concern. "Vehicle-sales growth appears to be flattening out," said Jeff Schuster, LMC's senior vice president of forecasting. "While this is driven by an array of variables, including slow economic growth and stock market volatility, a pattern is emerging sooner than expected." [Emphasis added.)

In other words: We may be at the top of the cyclical growth curve.

What a slowing U.S. new-car market would mean for auto investors

Since the end of the last recession, auto investors have become accustomed to big year-over-year U.S. sales increases. Nearly all of the major automakers have seen sales grow nicely in the important and lucrative U.S. market in recent years. The pace of growth slowed somewhat last year, but companies like Ford (5.3% increase in 2015) and General Motors (7.8% increase) still managed to find good growth in the U.S. -- and good profits, too.

Those profits might stay strong for a while longer, as buyers continue to shift away from (less profitable) sedans toward (more profitable) SUVs. But it's possible that the U.S. new-car market's growth streak may be coming to an end, and that could cause automakers' profit growth to stall.

To be clear, that's not a disaster. Automakers are cyclical businesses; anyone investing in an automaker should be prepared for the fact that the sales-growth cycle will end at some point. And companies like Ford and GM (and most of their rivals) are well prepared for a downturn, with ample cash reserves to sustain product development if and when profits flatten.

But if that point is now, then it may be tough for many of the automakers to post quarterly profit growth for a while -- and that means that the stocks are likely to stall as well.

Why the market could end up beating this pessimistic forecast

It's also possible that the market will end up doing better than the forecast, as the analysts who prepared it freely admit.

"The Memorial Day weekend is one of the busiest car-buying periods of the year, and we expect it to account for 19% of the month's retail sales," said J.D Power analytics chief Deidre Borrego. "While month-to-date sales indicate we will see a slight increase compared with May 2015, a key variable is the extent to which manufacturers launch holiday incentive programs. Depending on the value and availability of those programs, there is potential for May sales to exceed expectations." [Emphasis added.]

In other words, if the automakers are aggressive with their Memorial Day promotions, May might turn out better than the forecast suggests. But it's also possible that this is the inevitable beginning of tougher times for the automakers. We'll watch it closely.

The article What It Means for Auto Investors if the U.S. New-Car Market Is Stalling originally appeared on Fool.com.

John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.