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.

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.

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.

The trend is "pushing down ratings on the unsecured debt, increasing the exposure to interest rate risk [and] lowering the recovery rating for the secured debt," Maddock said.

Additionally, the entrance of private equity firms has led to an increase in expensive second-lien debt that could be difficult to refinance in a higher-rate environment, he said.

Also, Maddock said, only a portion of foreign earnings can be viewed as support for the secured debt.

"The pace of this increase is somewhat higher than what we are seeing across the broader U.S. corporate spectrum, and puts recovering ratings in the auto sector under some pressure," Maddock wrote in his report.

Debt repayment could become problematic were another cyclical industry decline to occur, Maddock said.

His report lists 19 private equity firms that have issued new debt since 2009. Most recently, Henniges Automotive Holdings issued new debt in 2014, while Neenah Enterprises issued new debt in 2013.

-- Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.


TheStreet Ratings team rates GENERAL MOTORS CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate GENERAL MOTORS CO (GM) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GM's revenue growth trails the industry average of 21.5%. Since the same quarter one year prior, revenues slightly increased by 1.5%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.95, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.81 is somewhat weak and could be cause for future problems.
  • GENERAL MOTORS CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, GENERAL MOTORS CO reported lower earnings of $2.35 versus $2.93 in the prior year. This year, the market expects an improvement in earnings ($2.82 versus $2.35).
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Automobiles industry. The net income has significantly decreased by 80.3% when compared to the same quarter one year ago, falling from $1,414.00 million to $278.00 million.
  • In its most recent trading session, GM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Despite the stock's decline during the last year, it is still somewhat more expensive (in proportion to its earnings over the last year) than most other stocks in its industry. We feel, however, that other strengths this company displays offset this slight negative.

TheStreet Ratings team rates FORD MOTOR CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate FORD MOTOR CO (F) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its increase in net income, growth in earnings per share and increase in stock price during the past year. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500 and the Automobiles industry average. The net income increased by 6.3% when compared to the same quarter one year prior, going from $1,233.00 million to $1,311.00 million.
  • FORD MOTOR CO has improved earnings per share by 6.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past year. However, we anticipate underperformance relative to this pattern in the coming year. During the past fiscal year, FORD MOTOR CO increased its bottom line by earning $1.75 versus $1.42 in the prior year. For the next year, the market is expecting a contraction of 25.1% in earnings ($1.31 versus $1.75).
  • F, with its decline in revenue, underperformed when compared the industry average of 21.5%. Since the same quarter one year prior, revenues slightly dropped by 1.8%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • In its most recent trading session, F has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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