Europe is a big topic throughout the entire stock market, but auto companies have specific concerns to deal with. The industry is doing quite poorly, which means that companies like Ford (F), General Motors (GM), and Toyota (TM) are struggling at the moment. This is not the only market that is hurting auto companies though. Honda Motor (HMC) and Toyota have another troubling situation to deal with related to the yen. Additionally, Tesla Motors (TSLA) and others may see slow growth in U.S. sales of plug-in-electric vehicles. All these auto companies have difficult situations to deal with. In this article, I will focus on why investors should be cautious when considering any of these five auto stocks.
The situation in Europe continues to worsen for major car companies, and Ford has received some negative press as a result. Ford has recently warned that second-quarter losses could be as high as $570 million or "triple the $190 million lost abroad in the first quarter." This will lower investor confidence, especially since the situation was already bad enough before this quarter. Following the announcement, UBS (UBS) decreased its full-year per-share earnings estimate for Ford from $1.60 to $1.45. Ford stock (trading around $9 and a half per share) is sitting near the bottom of its 52 week range and there's little to suggest it will climb back even to the middle of that.
This announcement may also make investors question Ford's ability to handle struggling markets, but another announcement may help improve investor confidence a little more. Although the market has not been strong in India, Ford reported that it maintained steady sales rates in the month of June. While this could become another troubling market for Ford, it is promising that the company has been able to remain successful. The loss in Europe is so tremendous that this is quite a minor success in India. It is a success, however, as this will be an area that does not contribute to Ford's huge losses.
Ford is not the only one suffering from the difficult situation in Europe, as General Motors is also facing trouble. Chief Executive Dan Akerson recently announced that the situation in Europe may bring down profits for General Motors for the rest of the year. The European car industry is in such a bad place because of overcapacity and little demand. Not only are things bad, but they may keep getting worse. Akerson said, "I'm a little bit worried about the second half, because you can see softness in Europe." Things are not looking good, and both third-quarter and fourth-quarter profits may be dropping significantly.
The Dow Jones Industrial Average moved upward after some leaders in Europe announced a plan to rescue banks and help governments with large amounts of debt. General Motors and Ford stock prices continued to fall, however, as a result of the remaining concerns over their profitability in Europe. Alec Gutierrez-senior market analyst of automated insights for Kelley Blue Book-claimed, "As conditions in Europe continue to deteriorate, we could see a reduction in demand for goods imported from the United States." Much like what Akerson noted, this means that things may continue to get worse for General Motors, Ford, and other auto companies with a stake in the European market.
Much like Ford, General Motors (trading for just over $20) is nestled near the bottom of its 52 week range and its 52 week high of over $31 seems light years away right now.
Toyota is one company that is in a slightly better position, but I do not think its efforts are enough to overcome to the overarching problems in the European market. Toyota has recently expanded its collaborative efforts with BMW to include work on lightweight construction, fuel cells, and electric drivetrains. This work together will help the companies handle the stricter environmental regulations over automobiles in the European market. The expectation is that the European Commission will soon propose to limit CO2 emissions to 95 g/km by 2020. This means that environmental costs will keep going up, and partnerships like these will help auto companies remain competitive in the European market. Since the market has been so bad recently, however, Toyota is still not in great shape. The situation with the market will affect Toyota as well and drive down profits, even if the company is acting wisely when considering the distant future.
Unlike the American giants, Toyota stock is fairing well in its 52 week range. At about $80 per share, Toyota is a more expensive buy. However, the stock is up from about $68 at the beginning of 2012, and up from $76 at the beginning of June.
Toyota and Honda have an additional situation to worry about, as the yen has grown stronger and pushed down a variety of Japanese stocks. The given reason for this negative effect is that "a stronger yen makes Japanese goods more expensive abroad and hurts repatriated earnings." This makes it harder for them to stay competitive abroad, so they may be in an even worse position in Europe. Even with Toyota's positive development with BMW, it is continuing to struggle just as much as the other auto companies.
The European market is not the only one that is bringing down auto stock though, as Tesla faces difficulties with the U.S. market. In the month of June, U.S. manufacturing was down for the first time in three years, making the economy look a little weaker. People are being careful to note that this "does not mean recession for the broader economy," but it is still a bad sign. Companies that are putting a lot of focus on electric cars have more to worry about, as U.S. sales of plug-in-electric vehicles are expected to be weak through 2015. Global sales may be much stronger. With the situation in Europe remaining so weak, however, it is particularly bad news for Tesla and others, as the U.S. market may also be poor for the auto industry over the next couple years. Ford, Toyota, and General Motors have also been looking at the electric car industry more, so it will be interesting to see how much this affects them. No matter what, electric cars do not seem to be the answer to the poor markets that are dragging down their sales numbers.
Ford, General Motors, Honda, Toyota, and Tesla all have difficult situations to deal with as a result of struggles or changes in various markets. Europe is one of particular concern, but the strengthening yen only intensifies this problem further for Toyota and Honda. Even if Ford and Toyota are reporting some positive developments, they will not be immune to this difficulty in any way. All five stocks are in tricky positions, therefore, so this would not be a good time to get involved with any of them. I expect them to continue dropping, especially since expectations continue to be low for future sales as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.