April Auto Sales: 'Green Sprouts' Overshadow Bankruptcy Tumult

Hopefully, April showers will in fact bring May flowers as the month was tumultuous for automakers. The stock market rally that began in March continued through April, with some bad news being completely discounted.

There were plenty of earnings reports that did not have such a rosy outlook for the future, but the stocks still traded higher. Ford (F), for instance, lost $1.4 billion, but it was considered a strong quarter. We have shifted from good versus bad to bad versus less bad. That being said, Ford continues to look like the strongest of Detroit's Big Three. Chrysler was forced into bankruptcy, and despite all the rhetoric, we think that it will be a messy filing.

Working on the side of the quick filing happening is the fact that all Chrysler plants are closed until this is settled. While it will help the more than three months of inventory that is currently sitting on dealers' lots, it does nothing to help those workers, and with a plant closing, entire towns have the potential to go under. The figure for the annual sales rate (or SAAR) came in at 9.32 million vehicles, according to Autodata. That was down from 9.86 million in March and 14.52 million in April of 2008. Still, it was better than the 9.12 million vehicles in February, which was the lowest level since December 1981.

It is zany when a company sees sales decline 31.4% year over year and is considered one of the winners of the month. A portion of the sequential declines in sales can be attributed to the end of many incentive programs. There have been conflicting data with respect to the amount of incentives given, but from our research, many companies lessened the amount of incentives that were being offered during the first three months of the year.

So let's look what has happened for the past month for the automakers... Chrysler was forced into bankruptcy, and now an Italian automaker could potentially have a 35% stake in the company without putting up a dime. Hmmm, that one doesn't exactly sound "fair" for the American taxpayer. Next, we have that same Italian automaker making a run at Opel from GM Europe. Fiat is already saddled with $6.0 billion worth of debt and swung to a loss for its first quarter. Doesn't anyone else see the same beginning steps that got us into this situation in the first place? Detroit's Big Three went debt crazy acquiring new brands (without cutting any type of costs); one has already gone under the courts' protection, and the second is on the verge of entering. General Motors (GM) is in a last ditch effort to avert the inevitable, offering its bondholders pennies on the dollar for a 10% stake the restructured company. Not surprisingly, it doesn't seem like the 90% of bondholders needed to make the plan work will accept the offer.

We believe that General Motors will in fact enter bankruptcy on May 31 or June 1, similar to the way that Chrysler did. It will be interesting to see the reaction on Wall Street to the filing. Personally, I think that there is going to be a little rally in stocks as it is finally done and over with, and now the company and country could begin to rebuild. General Motors will likely be even more of a messy bankruptcy, and we hope that it does not go the same route as Chrysler and close all its plants during bankruptcy. The ripple effect could be huge, in addition to the 2,600 dealers that the company wants to close.

I do feel that the current market does present many opportunities to make money with respect to holding some of the automaker stocks. I think that Ford will continue to benefit from the troubles at General Motors and Chrysler, though it is not out of the woods yet. If CEO Alan Mulally's plans do not come to fruition, the company has the potential to be on Capitol Hill's doorstep asking for money. With respect to the foreign automakers, we feel that most of the bad news is already being baked into the stocks. Toyota Motors (TM) and Daimler (DAI) are our two favorites, but we do feel that Honda Motor Company (HMC) will benefit from the continued push towards more fuel efficient vehicles.

Written by David Silver, a Research Analyst for Wall Street Strategies (www.wstreet.com) covering companies in the Transports, Autos, and Beverage sectors.

Disclosure: None

Comments

[rick12345:]

I think your'e missing point here. Bankruptcy only helps the company against creditors dissmantling the business to recoup money owed to them. It does absolutely nothing to protect the thousands of people who stand to lose their job,entitlements etc.. or the shareholders that have invested billions into the company. The knock on effect is just too damn scary to even contemplate. Yeah, just watch the stock market go through the roof when the unemployment rate jumps to over 10% within a month.

May 06 02:51 AM

[WayneS:]

All the talk about fuel economy is a ruse. American auto makers have been putting out vehicles that get better fuel mileage than the Japanese car makers for over 60 years. People just don't want them. They want big, fast, powerful cars that intimidate others. If they can't afford a big one, they get overly bright headlights to compensate. My first car, a 1960 American car averaged over 30 mpg and was the size of a Ford Explorer. It had overdrive and free-wheeling. My latest car, a 2003 Buick LeSabre gets over 30 mpg on the highway. PS, while I was working, I got over 100 mpg because I carpooled.
American car makers only problem is that they have hundreds of variations for each make, i.e., each car is customized along with the added expense. They need to go back to Henry Ford's original idea and have limited options.

May 06 12:19 PM