Pile-Up! What is Wrong with Domestic Automotive Stocks?
Automotive Holdings (ASX:AHG) issued a downgraded earnings report this week, joining fellow automotive retailers AP Eagers (ASX:APE), Automotive Solutions (ASX:4WD) and Super Retail Group (ASX:SUL), all of which have all guided expectations down in the just past month. With this cohort experiencing an average price fall of over 25% in the past four weeks alone, investors should be asking themselves if the era of the automobile (and auto related investment) is coming to an end.
Australia's car sales statistics have been impressive over the past 9 years, particularly in light of the benign economic backdrop. Monthly New Motor Vehicle Sales - having dipped to 74,000 in November 2008 during the height of the GFC - have risen steadily, topping out at just over 100,000 (seasonally adjusted) in September 2016. However, as this ABS graph shows, there has been an obvious slowing in the past 6 months.
A combination of 'must have' new car features: think the myriad of new safety features and smart device connectivity; the 'wealth effect', driven by rising property prices, low interest rates, increased affordability; population growth and irresponsible BMW salesman, have all been factors driving this sales performance.
However we suspect the upgrade cycle for cars, like many other consumer goods, is lengthening significantly, or indeed ending completely.
Car specific factors such as longer warranties (Kia offer 7 years) and improved reliability; combined with external factors such as affordable car-share programs; Uber and ride sharing; increasing congestion; medium density housing (say good-bye to the two-car garage); increasing tolls, parking, registration and insurance; and excessive policing and fines are all impacting the attraction of 'owning your own car'.
And Carsales (ASX:CAR), the clear market leader domestically, has been experiencing a slowing in revenue growth, most recently due to a drop off in its financing division, a definitive sign of the industry slowing.
This move away from the car is being clearly reflected in the extraordinary increase in inner city-cycling numbers. In Melbourne, cycling numbers have more than doubled in the past 8 years and government spending on cycling related infrastructure is a growing priority.
In addition to these current concerns, just over the horizon, is the ‘driverless car’, an industry that is seeing a flood of investment money and which is bringing a mind-boggling array of business challenges to the traditional automotive sector.
One could easily make the argument that, on a 10 year view, the automotive sector has to be a declining industry.
And who wants to invest in that.
Dean has over 25 years experience in the funds management industry covering all major asset classes. He holds as Master of Applied Finance and is a Graduate of the Australian Institute of Company Directors.
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Comments
Alex Cowie
Great wire Dean, thanks for posting. It's a very interesting theme. The speed with which we move to driverless EVs may catch many off guard.
Dean Fergie
I don't see driverless being widely adopted for more than a decade or two (government regulation will be the greatest hurdle for widespread use) but as theme becomes more apparent, investors will start reconsidering their approach and the valuations they apply to these stocks.
Philip Whish-Wilson
Dean I'm not convinced you have nailed the real reasons why there has been a recent decline of new car sales. Where is the evidence that new car sales have declined because of more people taking up bike riding to work, sharing access to communal cars and driverless? The feedback I have is that the decline is more likely linked to the wealth-effect (or lack of) that appears to declining in WA and Qld due to the fall off in mining activity. Also, the recent tightening of credit (by lenders) and govt. budgets (effecting govt. fleet purchases) and the flat lining of wage growth are seen to have had the most profound effect. Furthermore, driverless cars - when they become a factor - still have to be purchased from someone. I'll give you a concession on the possibility that new cars these days tend to extend the 'use-by' date for many car owners; however, is there any industry evidence to support this 'belief'? More evidence, please, to support your article. Phil Whish-Wilson
Michael Howson
Or is it that we just have a cyclical industry cycling again (or now just bicycling!) Cyclists killing cars, a nice irony
Dean Fergie
Hi Phil, Thanks for you comments, you're completely correct, the recent declines in sales have been concentrated in WA and QLD and it is very likely that this is primarily a result of the fall-off in the commodity sector. However the counter-argument is that there had previously been an unusually high-level of sales as a result of falling interest rates and a booming mining sector. Of course the car sector is not alone, retailers across the board appear to be struggling this year. But drawing a direct statistical link between car 'turnover' and a decline in sales is impractical, particularly in the short-term. It is simply my opinion, but one I am confident has merit.