U.S. Car-Buying Boom: Time to Downshift? -- Ahead of the Tape

By Charley Grant 

The auto-sales boom is growing old.

Investors are preparing themselves for that message when car manufacturers on Wednesday report May new-vehicle sales in the U.S. Analysts at Kelley Blue Book expect that U.S. car sales totaled 1.53 million in May, which would mark a 6% drop from a year earlier.

Though the month has two fewer selling days than it did last year, it would be the sharpest decline for a single month since August 2010.

On the bright side, the projected seasonally adjusted annual selling rate of 17.4 million is still quite strong. And there may yet be some upside. After all, the critical Memorial Day selling weekend fell at the end of the month. That makes full monthly sales tough to predict, and a strong holiday could yet brighten the picture.

Still, given that auto sales are a cyclical business, it is only natural that some weakness would begin to set in. Kelley Blue Book expects that 79.1% of sales were to retail customers, down from 80.5% a year ago.

Meanwhile, some macroeconomic factors that have helped nudge sales seem to be fading. Gas prices, while still relatively low, have recently crept upward. And while cheap credit remains readily available to car buyers, the risk remains that easy lending conditions have helped to pull future demand forward.

That is one reason auto-maker stocks command low valuations. General Motors Co. and Ford Motor Co. trade at five and six times estimated earnings for the coming 12 months, respectively, according to FactSet. Value seekers might find that low ratio appealing, but it won't mean much if sales and, in turn, profits begin to deteriorate.

One silver lining is that bad news won't take the market entirely by surprise. GM and Ford shares have each sold off by more than 10% over the past year, even as auto sales rose to new heights. The absence of investor euphoria should help soften the blow from any bad news.

The flip side is that even an upbeat report is only likely to postpone, rather than eliminate, investor anxiety. After all, nothing lasts forever -- certainly not economic, or auto sales, cycles.

(END) Dow Jones Newswires

May 31, 2016 12:48 ET (16:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.