Auto Sales Stay Frothy in July -- but S&P Spots a Debt Problem

Story has been updated with Monday opening prices for Ford and GM.

Detroit (TheStreet) -- Forecasters say July auto sales will likely reach their highest level since 2006, as the sector's growth continued to outpace the economy.

Meanwhile, a Standard & Poor's credit analyst said the rapid sales are fueling a potential crisis for recovery ratings in debt financing by secondary auto suppliers. Those ratings now lag the U.S. corporate average.

Shortly after Monday's opening bell, GM (GM) shares were trading down 5 cents at $35.02. Shares are down about 14% year-to-date. Ford (F) shares were trading down 5 cents to $17.57. Ford shares are up about 14% year-to-date.

J.D. Power projects that July U.S. light vehicle sales will gain 5% to 1.2 million units, while TrueCar estimates sales will gain 10% to 1.4 million units and Edmunds projects a gain of 11% to 1.5 million vehicles. Edmunds said sales will be at their highest level since July 2006, when the industry delivered 1.49 million new vehicles.

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J.D. Power estimates the seasonally adjusted annualized rate will be 16.6 million, while TrueCar projects 16.7 million and Edmunds projects 16.8 million. Auto sales reached 17 million in 2005, declined to 10.3 million in 2009, and then began a steady climb, a sign of a gradually improving economy.

As an economic indicator, auto sales measure a major purchase, are reported quickly and are never revised.

Big July winners, according to TrueCar, will be Chrysler, with a 23% sales gain, and GM, with a 14.5% gain. TrueCar said GM incentives would decline 0.6% from June, in line with the industry average. Edmunds forecasts that Chrysler sales will gain 23% while GM will gain 10.6%. Ford, Hyundai, Toyota (TM) and Nissan (NSANY) will have gains ranging from 10.2% to 13.4% respectively, Edmunds said.

"The automotive industry recovery in the United States, which has had two upward revisions [in sales estimates] in the last two months, remains ahead of that of the U.S. economy, which has been revised down to less than 2% for 2014," said LMC Automotive analyst Jeff Schuster, in a prepared statement.

"Further upward momentum in light-vehicles sales remains a strong possibility if the remainder of the year keeps pace with recent months and the expected improvement level in the overall economy is realized," Schuster said.

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An unfortunate result of the healthy sales is that its average recovery rating for smaller auto suppliers lags behind the average recovery rating for the U.S. corporate sector, S&P said.

While many of the major auto suppliers are public companies, many smaller ones are held by private equity investors, said S&P credit analyst Greg Maddock. In the healthy automotive economy, many of those smaller firms "are refinancing senior unsecured notes with covenant-light institutionally secured loans," he said in an interview.

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