Why Auto Company Stocks Are Facing Massive Downside

Whenever a crisis comes along, there are always certain industries that are more exposed than others. That’s exactly what we are seeing now as automobile companies are facing unprecedented downside risk due to the uncertainty surrounding coronavirus and its impact on the economy. We’ve already seen Ford Motor Co. NYSE: F warn investors about lower sales and adjusted operating losses of $600 million in the first quarter and we can expect to see many other auto companies follow suit.

The situation that the auto industry is facing is fairly complex because there are so many different components of their businesses that are being affected by the economic shutdown and global health crisis. Automobile companies’ sales, supply chains, consumer demand, and more are all being directly impacted by the coronavirus. Let’s take a more detailed look at some reasons why auto stocks could be in store for massive downside going forward.

Factory Closures

We already know that a ton of different businesses have had to decrease their production output due to the impact of the coronavirus, and auto companies are no different. The major production facilities for automobile manufacturers like Toyota NYSE: TM, Honda NYSE: HMC, and Ford NYSE: F are simply not open at this time. Ford shut down all of their production in Europe and North America on March 19^th without a concrete reopening date. Toyota also recently announced that it has suspended production at its factories in Brazil for at least another 60 days.

These types of closures will result in a large impact on auto companies’ bottom lines, but the true scale of the losses is hard to quantify at this time. With no concrete date that factories can reopen, earnings per share and net income are going to be impacted substantially this quarter and potentially for the rest of the year. As long as their production facilities are closed, these businesses are taking large revenue hits.

Consumer Spending Down

One of the basic principles of economics that investors should understand is that when the economy is facing a recession and high levels of uncertainty, consumer spending goes down significantly. This is another one of the factors impacting the automobile industry since there aren’t many people going out to buy new cars at this time. Also, purchasing a car has always been something that consumers like to do in person, but that is not possible at this time with the current nationwide shutdown. Some auto companies like GM and Ford are trying to offer customers online shopping and auto delivery, but it’s hard to imagine sales reaching anywhere near the numbers they would with in-person shopping.

We don’t know how long this economic downturn will last or even how many people will be financially impacted, which is one of the big reasons why auto company stocks are facing so much downside risk. The more time that the economic shutdown is in place, the more time it will take for consumer spending habits to return to where they were prior to the health crisis.

Auto Loan Market Showing Danger Signs

Another important component of understanding the downside risk for auto stocks is danger signs in the auto loan market. There is currently $1.3 trillion of auto loan debt in America and it seems that many people were struggling to pay their auto loans prior to the coronavirus situation. This is not good news for auto companies that rely on banks and credit unions to help consumers purchase their products.

Lenders are going to take a beating in the coming months as more and more people deal with unemployment and the inability to pay off their car loans. It’s quite possible that lending requirements become more stringent the longer that the coronavirus situation draws on, which is bad news for auto stocks. This is an issue that can have a huge negative impact on both the automobile industry as well as the credit market, so keep your eye on this trend going forward.

Big Questions Ahead

The bottom line is that the auto industry has never faced more immediate downside risk than it is experiencing right now. A combination of the global health crisis, uncertainty in the economy, and an auto loan market that was already showing signs of trouble prior to the coronavirus all can contribute to the downside for auto stocks in the near-term. It would be most prudent to stay cautious with any investments in the auto industry going forward until we gain more clarity about how their earnings reports will truly be affected by the economic shutdown.