Auto Stocks Fare Well in War

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DETROIT — Auto sales are on track in March for a 15.25 million annualized selling rate, says one survey by J.D. Power and Associates, the lowest monthly rate in four years. But even if the bombs stop falling in Baghdad this week and Saddam Hussein is escorted away with a raincoat over his head, it could be months before consumers are feeling game enough to flock back to the showrooms.

Should the conflict become protracted, the sales rate could plummet to 13 million or 14 million units, predicts Walter McManus, executive director of global forecasting at the J.D. Power & Associates market research group.

”If the war drags on and if it takes a long time to get to Baghdad, then the uncertainty people are feeling can create a recession,” said McManus. “If the war is over quickly and successful, then the industry can recover and sales could be at an even higher rate.”

Incentive war, too?

What remains to be seen is whether General Motors will uncork an across-the-board zero percent for five-year loans program that covers everything from Cavaliers to Cadillacs. If they do, Ford and Chrysler may not match the deal, but weigh in with a more strategic program that pushes certain models over others.

“The market is being impacted by the uncertainty over the war…Once we see some finality to this situation in Iraq, we will see the market come back and we expect that incentives will be important,” said former GM chairman Jack Smith.

“It could be a 9/11 event where, if we play the right notes, there could be kind of a reverse reaction where sales improve," said Gary Dilts, senior vice president of sales at DaimlerChrysler AG's Chrysler Group.

Ford Motor Co. sales analyst George Pipas agrees. “Who would have thought the month after the terrorist attacks the auto industry would have experienced the best month on record?” said Pipas. “You could, though, describe a scenario opposite of that with negative implications on the economy and industry.”

Unlike the September 2001 terrorist attacks, which were over in a day, automakers don’t want to rev up any program while fighting and bombing is ongoing.

Many automakers went dark with advertising last week on TV stations. Everyone was off network TV due to news coverage of the war, and some, like Nissan and Toyota, went totally dark. Newspaper advertising was being channeled away from news pages and into sports and leisure sections. GM, Chrysler and Ford were still advertising in some national newspapers last week.

The Federal Reserve kept interest rates steady last week, delaying what many expected would be a 25 basis point cut in the Federal Funds rate. Mortgage rates recently dropped, touching off a spike in new mortgage refinancing, but Wall Street is not looking for tapped mortgage equity to be the engine for new car sales it was last year.

GM pushed incentive spending 33 percent higher in February than the same month a year earlier, according to Merrill Lynch. But the company has told Wall Street analysts that it still has some room to maneuver to stimulate sales for the Spring selling season provided worse-case scenarios don’t come true related to the war such as domestic terror events or chemical warfare in Iraq.

Stocks doing okay

Auto stocks, despite warnings of lower sales and production and weaker profits, have been rallying with the rest of the stock market.

Ford shares, beaten up earlier in the month to an eleven-year low, had climbed 21 percent in the last eight trading sessions. GM was up 18 percent over the same time period. DaimlerChrysler was up about 14 percent.

Still, many analysts are bearish about investing in auto stocks, fearing that a bounceback in demand will be long in coming.

“Despite the recent really in auto stocks we would advise against buying auto stocks based on negative fundamentals in the industry,” said Deutsche Bank analyst Rod Lache on Friday. “If history is any guide shares during the 1991 Gulf War initially rallied at the start of the hostilities...but quickly pulled back as it become clear that demand was not rebounding,” said Lache.

GM is pegging the first quarter selling rate at 16 million based on their tracking of March sales, and they are betting the low 16s in the second quarter despite production cuts, and mid 16s in the third quarter.

In 1990, sales were tracking at about 14 million, and then dropped to an annualized rate of just above 11 million in January 1991 when the air war in Iraq was in full flower. Sales didn't bounce back to 14 million units until 1993.

Perhaps most troubling to Wall Street is declining variable profit per vehicle as automakers spend freely on incentives without getting the same sales volume payoff they got last year.

Merrill Lynch analyst John Casesa last week joined some of his peers in downgrading 2003 earnings estimates for GM and Ford, lowering his GM forecast by 17 percent to $3.35 per share and by 26 percent to 37 cents a share for Ford Motor Co.

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