Why American Car Sales Must Go Up

Auto sales are likely to remain strong in the U.S. However, the stock prices of General Motors (NYSE: GM) and Ford (NYSE: F) are down 30% so far this year. October domestic car sales are supposed to rise as rapidly as they have in a year. Auto sales and stock prices should track one another more closely. Yet, investors believe they see something car buyers do not. They miss the reasons why auto and light truck sales stay brisk.

Honda (NYSE: HMC) reported earnings recently. It missed Wall St. estimates and cut its forecasts. That was due in part to the price of the yen. But the most important cause was slow sales. Production cuts in Japan because of the March earthquake might be seen as a cause for the slowdown short term. Honda’s long-term forecasts were not affected by that, though. The figures were another in a series of signals that the next several quarters will be tough for Honda. That may be the case, but the industry as a whole is a different matter.

The expectations about auto and light truck sales in the U.S. are a battle between strong current sales and the perception that those strong sales are about to end. On the side of optimism is the fact that consumers may have reduced purchases on many items, but cars are not among them. And the trend should continue even if the economy does not get better.

Typical Americans used to buy a new car every two or three years. They extended that period to an average of  more than five years at the depth of the recession. That was the major reason U.S. auto sales were so depressed in 2008 and 2009. Now the cars that Americans drive are getting old enough that routine repairs have become expensive ones. Car companies, in the meantime, have cut financing to levels as low as zero percent over five years. That brings the cost of new vehicle ownership to an unprecedented low level.

The period in which Americans need to replace cars will end in a year or two. Many of the six-, seven- and eight-year-old autos and light trucks will be off the road. Millions of new ones bought in 2011 and 2012 will be at the beginning of their warranty periods and will have logged very few miles.

Car company stocks are too low. The drop makes little sense. Americans cannot afford expensive repairs on old cars when the costs to own new ones are so low.

Douglas A. McIntyre

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