Auto Sector Outpaces Broader Market Losses As Used Car Sales Falter In February

Shares of auto makers, along with the companies that supply them, are outpacing the broader market decline, continuing the group’s weakness that started last week. 

DECLINING USED CAR VALUES: In a note out Monday, Morgan Stanley analyst Adam Jonas said the firm believes the decline in used car values may happen sooner than most analysts see, however the downturn “could also prove to be far more severe.” Used car prices are a critical component to the algorithm of new car pricing as consumers will be likely to opt for a good value in a used car than pay a premium for a new one. According to a report from NADA, a division of JD Power and Associates, prices for used vehicles reversed what is typical of February as “used vehicles up to eight years old fell substantially last month, dropping 1.6% compared to January.” The decline is in stark contrast to the 1% increase that was expected. A negative reading for February prices has happened only once before in the past 20 years. NADA noted that seasonally adjusted used vehicle price index fell for eight consecutive months. ” The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble,” NADA continued. According to the report, the February drop was partly a result of an 18% spike in incentive spending in February as dealers try to abate the the new inventory surplus levels that are at decade highs.

FORD IN PARTICULAR: According to the aforementioned research note, Ford (F) has a notably higher level of auto financing assets relative to its market capitalization. “We see Ford as particularly vulnerable given the size of its Finco program relative to other OEMs,” Jonas warned. Morgan Stanley reiterated its Underweight rating on Ford and $11 price target. Ally Financial (ALLY) also chimed in on auto weakness, saying that it along with several other banks are “closely monitoring” auto finance credit trends and adjusting pricing and/or underwriting,” pointing to a “noticeable shift over past few months.”