Macro Wrap – Weathering Elevated Auto Inventories

by Enis March 28, 2014 9:21 am • Commentary

Ford and GM have had a disappointing start to 2014, after a strong run in 2013 that had attracted a good amount of attention.  Well known investors like Warren Buffett, David Einhorn, and Kyle Bass all own shares of GM, while it appears fewer hedge fund whales own Ford (We own a bullish GM structure, post here).

However, the two big U.S. auto stocks have been under pressure for the past 3 months, as sales data in that period has been lower than expected.  As winter draws to a close, market participants will be watching sales data with a keen eye to assess just how much of the recent sales stagnation was due to weather vs. weak demand.  GS Research graphed the high inventory levels in a research report this morning, with the following excerpt providing a sense of the report:

Inventory levels at elevated levels due to weather…..overall inventory in the channel remains somewhat elevated in February ending at 75 days supply (Exhibit 8). This is somewhat higher than the 65-70 days range that is considered normal for the industry. We believe this is mostly due to weather and could be cleared in March/April should pent-up demand materialize. Bloated inventories have led to increased incentives, and the industry may require production cuts should our sales forecast not materialize.

Screen Shot 2014-03-28 at 8.28.49 AM

Inventories are quite elevated at both GM and F, though GM’s better-than-expected February sales data did provide some reasons for optimism.  Analysts like those at GS do expect the pent-up demand to show up in the coming months, in which case the current elevated inventory levels are just a shift of sales from the winter to the spring and summer.

Whether this scenario comes to pass or inventories remain high instead will likely be a good test of the underlying strength of the broader economy as well.  Inventories as a whole have built up over the past 6 months, with autos a good indication for other sectors as well.  Are inventories high because of the weather or because of too much capacity vs. too little sales?  The answer to that question will likely determine the nature of corporate results over the next 6 months.