Pile-Up! What is Wrong with Domestic Automotive Stocks?

Dean Fergie

Cyan Investment Management

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 Fergie
Director & Portfolio Manager
Cyan Investment Management

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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