A grim warning from Bank of America Merrill Lynch Friday of a "swift and material downturn" in U.S. auto sales slammed stocks of General Motors (GM), Ford (F), Fiat Chrysler (FCAU), Lithia Motors (LAD) and their peers across the automotive industry.
BofA Merrill Lynch sees auto vehicle sales falling to a 13 million unit annual rate by around 2021 as a "tsunami" of off-lease used cars hit prices and raw material costs potentially increase. For May, U.S. auto sales were estimated at an annualized pace of 16.7 million, the fifth straight month of year-over-year declines. Last year, a record 17.6 million autos sold in the U.S.
Auto sales have slowed this year as a glut of used cars weighs on pricing; banks tighten lending standards as delinquencies and defaults pick up; and worries grow that current cars could soon be obsolete as new technologies disrupt the automotive industry. And automakers have relied heavily on leases to push the metal out the door, but an increasing number of late-model vehicles are hitting dealers.
The bigger concern is that the auto sales downtrend could signal worsening consumer sentiment and spread contagion through the rest of the economy. Spending on cars, other vehicles and auto parts is big part of consumer outlays. The broader auto sector accounts for a huge share of U.S. manufacturing jobs, with a big drop in sales sure to lead to big layoffs by automakers and suppliers.
Just last week, Morgan Stanley's Adam Jonas cut his sales estimate for this year to 17.3 million from a prior view of 18.3 million. By 2019, he expects annual sales to fall to 15 million — matching the 2013 level — vs. earlier estimates of 19.2 million.
On Friday, Bank of America Merrill Lynch cut small car dealer Lithia Motors to underperform while reducing price targets across the automotive landscape, from manufacturers such Ford Motor, General Motors and Fiat Chrysler to suppliers and retailers such as Delphi Automotive (DLPH), Lear (LEA), Sonic Automotive (SAH), Magna International (MGA), Group 1 Automotive (GPI) and CarMax (KMX).
Shares of Lithia cratered 8.7% to close at 88.57 on the stock market today. Group 1 Automotive and Sonic Automotive lost 4.2% and 7.9%, respectively. Used-car dealer CarMax shed 1.4%. Among manufacturers, General Motors fell 0.9%, Ford dipped 0.2% and Fiat Chrysler lost 0.7%. Parts supplier Magna gave up 3.9% and Delphi eased 1%.
Tesla (TSLA) lost 1% as the stock takes a breather from its climb to record highs earlier this week. The electric carmaker appears not to have been named among BofA's price-target cuts Friday.
U.S. automakers also face sales pressure abroad as China starts to strictly limit new car production.