Investors will get another number after Wednesday’s close that they should consider acting on—monthly U.S. auto sales.
May’s number will be solid if the figure from April is any indication. April’s total for light vehicles—monthly sales are reported as a seasonally adjusted annual rate, or SAAR—came in at 18.5 million, the highest reading since 2005, according to data available on Bloomberg.
That level shows demand is strong, despite a worldwide automotive semiconductor shortage that is limiting the supply of new vehicles—and driving car prices higher. In turn, the higher prices are pushing up auto stocks, a dynamic that can last longer than investors might expect.
Constrained production caused by the chip shortage, along with rising prices for commodities used in cars, sound like a recipe for stock market disaster. The cost of copper, for instance, is adding about $1,000 to the price of a new vehicle.
The jump isn’t all due to dealers simply jacking up sticker prices. With parts in short supply, auto makers are building the nicest versions of their vehicles. Those versions cost more and that makes the companies more money. That dynamic is even good for suppliers because nicer cars have more features.
The price/cost/vehicle mix has helped car stocks in 2021, despite companies throwing red flags about lost profits due to unplanned production downtime.
General Motors (GM)
shares, for instance, are up 44% year to date.
(F) shares are up 70%. Stock in parts suppliers
(MGA) and Lear (LEA) are up 44% and 24% respectively. Stock in car dealer
(AN) is up 50%.
But eventually shortages will ease, bringing automotive production back to normal levels. Dealers will have more cars to sell again. That might pressure stocks, but Spak doesn’t see that scenario unfolding anytime soon.
The analyst points out that U.S. car dealers historically have operated with about 65 days of inventory. Current inventory is 34 days. A month-plus of sales sitting on lots might seem large, but isn’t. That level “adds too much stress on the system and for vehicles like pickups, you need slightly higher days than average given the myriad configurations,” Spak wrote in a Sunday research note.
So inventories need to rise, but Spak doesn’t think the car companies want to return to 65 days. He sees 50 to 55 days will become new normal. Lower inventories will support pricing down the road. The less inventory on hand, the more power for sellers and the less for buyers.
Getting back to 50 to 55 days of inventory will take awhile, though. At current selling and production rates, Spak doesn’t see inventory normalizing until 2023. That’s important for auto stocks because when inventory is too high, dealers stop ordering and auto makers have to cut production. Falling production is one factor that can kill a positive automotive cycle.
Spak did his inventory math based on a 16.5 million annual selling rate. Right now, car sales are coming in higher than that. The May rate is expected to be north of 17 million units, down from the exceptional April rate. Still, anything above 17 million units should be a positive for the stocks.
Write to Al Root at [email protected]