Rising New Car Sales Offer A Mixed Bag

Includes: AAPL, DDS, F, GM, HMC, M, SIRI
by: Little Apple

New car sales will be released soon, and most analysts think that they will be up again for July. While doing research for another article about Sirius XM (NASDAQ:SIRI), and how new car sales are really helping that company, I stumbled on to something that could really be affecting the U.S. economy.

Many investors know that new car sales have been on the rise this year. The SAAR seems stable at around 14 million, and many experts are expecting 2012 to be the best year since 2007. And at first glance it appears that these sales are due to the economy improving, and getting past the economic slump the country has been in since 2008.

However, a big reason for these sales appears to be out of pure necessity. The average car on the road right now is around 11 years old. That means that millions of the 240 million cars in this country are older than eleven. So many of these brand new cars are just replacing cars that have literally completely worn out.

On the outside this seems like a good scenario. Car companies like Ford (NYSE:F), General Motors (NYSE:GM), and Honda (NYSE:HMC), to name a few, should begin to turn around. But for whatever reason that has not happened:

Chart forHonda Motor Co., Ltd.

As a matter of fact, if we look at the past two years (below), the stock prices peaked at the beginning of 2011, and have been on a steady decline ever since. Some analysts think this is due to the economic problems in Europe, which had been a good market for automobiles in the past. And that is probably right. Even though car companies are dragging, due to the European Gloom and Doom, many consumers in the US need a new car regardless of the problems in Europe. Experts are now beginning to notice an economic disconnect:

"There's a little bit of disconnect between what we're seeing in the economy and what we're seeing in the auto industry," Rebecca Lindland, an analyst at IHS Automotive, said in a telephone interview. "For the average consumer in middle America, they don't really care what the euro is doing. If they need a car, they're not thinking whether Greece is going to exit the euro zone from their Chevy dealership."

Chart forFord Motor Co.

What is troubling about this, is the amount of money going into these companies from the new car sales. In April of this year, the average price of a new car was $30,748:

If you've looked into purchasing a new car recently, we likely don't need to tell you prices are plenty lofty. According to TrueCar.com's data, the average selling price of a new car sold here in the U.S. last month was $30,748, marking an all-time record (last year's figure was just $28,771). While buyers are currently looking toward smaller, less expensive and more fuel-efficient models, overall vehicle sales have jumped ahead of the rest of the slowly recovering economy...

With the average price of a new car over $30,000 and 14 million new cars being sold in the US, that puts about $420 billion into that industry. The problem with that is this money has to come out of another part of the economy. The average new car payment is over $420 a month. Consider that someone just trading in their 22-year-old car has probably not had a car payment in over 15 years. With the economy like it is, most people need a car to get to work or school. And their budgets are stretched. To suddenly have an additional expense of $400 or more a month could be devastating to many consumers. This money will mean that these people will have to give up a lot of other things that they have been used to having. And with the current summer droughts, food prices are expected to go up also.

Most consumers are stretched so thin that there is not very much discretionary income to begin with. The biggest industry that will be hurt is retail. Clothes, furniture, household goods, and electronics will be cut. Obviously, the spending will not stop. There are still a lot of consumers who have those old cars without the car payment. And there are many more who have higher incomes, and therefore more discretionary income. But this will make a dent.

Companies like Dillard's (NYSE:DDS), Macy's (NYSE:M), Best Buy (NYSE:BBY), and Apple (NASDAQ:AAPL) will be affected. These companies all have hefty mark-ups, which consumers will pass on, in favor of cheaper items. Even though some people may not want to get rid of their iPhone, they might keep the old iPhone 4 rather than upgrading to the new iPhone 5 when it first comes out. And many will completely forgo Apple in favor of something cheaper. When you look at these four companies over the last three months, it is obvious that they are either down, or completely flat:

Chart forBest Buy Co. Inc.

But the picture is not as bleak as it seems. There are winners in this situation, besides Sirius XM. There have been a lot of American jobs created due to the higher US auto sales. Consider the average car salesman in this country whose average sale is now $30,000. I am not sure what the commission is on that amount, but with the sales rising, it has to be better than it was. Also, the car service industry is flourishing. Older cars need more maintenance, parts and service.

In my opinion, if you own BBY, M, DDS, or AAPL, I would hold them for now. There is a good chance that they could go lower, unless the economy truly turns around. If you are considering purchasing these stocks, and still think the price is too high right now, wait until October. Sometimes there is a nice dip followed by big returns in January after the end of the "Golden Quarter".

The auto stocks have too many international problems right now. And until the US sales can make up for the losses in Europe, I would invest in them with extreme caution. As far as Sirius XM, I am very bullish on it. There are a lot of investors that are suddenly interested in it, and the price is jumping. Sirius can take advantage of US auto sales rising, without having a European division to drag it down.

Disclosure: I am long DDS, SIRI.