Despite the six-week-long United Auto Workers strike, the Big Three U.S. carmakers experienced an increase in inventories. However, concerns about consumer spending persist, casting a shadow over the stocks.
Inventory Uptick Averts Higher Prices
Fortunately, the rise in inventory levels prevents the U.S. car industry from facing a situation characterized by lower inventories and subsequently higher prices. Deutsche Bank analyst, Emmanuel Rosner, noted in a recent report that this outcome was likely to occur if the strike had prolonged.
According to data from Motor Intelligence, Wards, and internal sources, Ford Motor Co. F, +2.07%, General Motors Co. GM, +2.54%, and Stellantis NV STLA, +3.54% all witnessed an increase in inventories during October.
Inventory Figures on the Rise
Ford currently maintains a 70-day supply of inventory, which is four days more than in September. In the case of GM, the inventory stands at 58 days, reflecting a nine-day increase compared to the previous month. Stellantis’s inventory sits at 92 days, signaling a rise of 11 days.
Ford Reports Slight Decrease in October Sales
Ford recently released its October sales figures, which showed a marginal 5% decline to 149,938 vehicles.
Notably, sales of the Bronco experienced a significant drop of 56% year over year due to production halts caused by the strike. GM and other carmakers have shifted to reporting quarterly sales and are expected to provide updates to investors in early January.
Tentative Agreements Reached
After an unprecedented strike that disrupted assembly lines and other facilities across all three companies, the carmakers have reached preliminary agreements with the union. These agreements are currently undergoing ratification steps.
In this process, workers secured substantial victories, including a 25% pay raise over the four-year contract duration, cost-of-living adjustments, the elimination of various wage tiers, and improved retirement benefits.
Comforting Inventory Cushion During Strike
Thankfully, carmakers entered the strike period with higher inventories compared to previous months. This provided a welcome buffer as the labor action continued and more workers joined the picket lines each week.
October’s New-Car Sales in the U.S.
According to Rosner, new-car sales in the U.S. for October reached an annualized rate of 15.6 million vehicles. While slightly lower than September’s numbers, this figure represents an improvement from October 2022’s seasonally adjusted annual rate of 15.3 million vehicles.
Positive Forecast for 2023 SAAR
The 2023 SAAR (Seasonally Adjusted Annual Rate) is predicted to reach 15.3 million vehicles, indicating a solid improvement from 13.8 million in 2022. Fleet sales are expected to drive this rebound, contributing to a sales volume slightly above 2021’s figure of 14.9 million.
Addressing Investor Concerns of Consumer Distress
Despite a promising SAAR, investor fears regarding consumer distress persist. Chris McNally at Evercore ISI highlights the need for car manufacturers to strike a balance between incentives and underlying unit replacement demand. While average car prices have decreased from their peak, an increase in discounts and incentives has stimulated consumer demand. Moreover, the heightened demand from rental car and fleet update initiatives has been instrumental in driving sales.
Impact of Lost North American Production
Analysts report that the strike caused a loss of approximately 215,000 vehicles in North American production. Although this amount is better than anticipated, it remains to be seen how this strike will affect the data.
Potential Effects on Vehicle Supply and Prices
Oxford Economics warns that the strike might have led to a decline in automobile output by as much as 20% to 25% in October. This could potentially reverse a significant portion of the improvements made in vehicle supply over the past year and subsequently drive prices higher.
Mounting Headwinds to Demand
Analysts predict that mounting headwinds, such as higher interest rates and tightening lending conditions, will impact auto sales moving forward. Additionally, a modest rise in the unemployment rate is expected in the coming quarters, contributing to a softening of demand.
Weaker Sales and Prospects for Rebound
With these factors in mind, analysts forecast weaker automobile sales in the fourth quarter and anticipate persistently weak sales throughout the first half of 2024. However, they do foresee a rebound in the latter half of 2024 as interest rates begin to decline.
Ford and GM Stocks Struggle
Ford and GM stocks have experienced difficulties this year. Ford’s stock has seen a decline of about 13% year-to-date, while GM’s stock is down 15%. These figures stand in stark contrast to the gains of approximately 12% seen in the S&P 500 index during the same period.
In conclusion, while the forecast for the automobile industry in 2023 appears positive, concerns surrounding consumer distress and headwinds to demand persist. The impact of the recent strike on data remains uncertain, and potential declines in vehicle supply may lead to higher prices. Nevertheless, analysts still predict a rebound in sales down the line as interest rates decrease. Overall, the performance of Ford and GM stocks has been lackluster compared to the broader market.