Detroit (TheStreet) -- Ford (F) on Friday discounted fears of an overheated auto market, saying the continuing rise in auto sales is being fuel by a need to replace aging vehicles -- and not by excessive incentives or credit.
"I wouldn't call it frothy at this point," said John Felice, Ford vice president for U.S. marketing, sales and service, on the automaker's monthly sales call. An analyst had asked whether Ford sees frothiness in the auto credit markets.
Felice said, "We have noted a gradual trend over the last three to four years to 72-month financing," extending the traditional 60-month term. He noted that "the low interest rate environment we're operating in [is] giving customers more choices." But he reiterated: "I wouldn't categorize it as frothy -- it's really good for consumers."
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Shortly after noon, Ford shares traded down 25 cents to $16.77. GM (GM) traded down 33 cents to $33.49.
Experts, including TheStreet's Doug Kass, have concluded that the auto market is becoming overheated.
"Growing evidence suggests that the automobile industry is about to pause/peak, just like the housing market did 12 to 18 months ago," Kass wrote in a column posted Thursday.
"The potential for climbing delinquencies on auto paper will likely result in banks beginning to withdraw somewhat from the previously aggressive lending policies that have fueled auto industry demand over the past five years," Kass said.
Edmunds.com said Friday that only about 23% of car buyers purchased with cash or outside financing this year, as opposed to dealer financing and leasing. The rate could be the lowest level ever -- down from about 35% just five years ago, Edmunds said.
Additionally, 13.5% of new car loans in July were financed at 0% APR, "the highest level we've seen since December 2010, when it was 15.4%," the firm said.
"You can't underestimate how important dealer financing has been to this automotive recovery," said Edmunds analyst Jessica Caldwell, in a prepared statement. "It's attractive enough when a dealer offers zero-percent APR, but now it's more common to see zero percent for as many as 72 months, which was virtually unheard of not too long ago."
U.S. auto sales continued to set a blistering pace in July, as Chrysler sales rose 20%. Ford said sales gained 10% and GM sales gained 9%. Chrysler (FIATY) had its best July since 2005, Ford had its best July since 2006 and GM had its best July since 2007.
Read More: July Auto Sales Continue Blistering Pace as Ford, GM, Chrysler Gain
Chrysler said it internally projects that the seasonally adjusted annual rate for U.S. light vehicle sales to be 16.8 million units, while GM projects the SAAR at 16.7 million.
The question is whether this is "frothy" or not.
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.
When a reporter questioned the reason for rising sales during the sales call, Ford economist Emily Kolinski Morris reiterated the industry's belief that an aging U.S. fleet is gradually being replaced as the economy grows, following a deep recession.
"If we look back to 2005 and look at the vehicles on the road that were 10 years old and older, that was 40% of the vehicles in 2005," she said. "If we look at 2013, estimated data, we think about 50% of vehicles on road last year were in the 10-plus age range.
"Replacement demand [is] still a fundamental force at work here," she said.
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Kurt McNeil, U.S. vice president of sales operations at GM (GM), said the growing economy largely explains the increase in auto sales.
"The economy has bounced back strongly from the harsh winter, consumer confidence has reached a post-recession high, energy prices remain moderate and job growth continues," McNeil said, in a prepared statement.
Written by Ted Reed in Charlotte, N.C.
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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.
- You can view the full analysis from the report here: F Ratings Report