If you think of the American culture since the 1950’s with the completion of the interstates, President Eisenhower wanted trucks moved from the west coast to the east coast after WW II and it took 2 weeks. He decided a better transportation system had to be done and the interstates were born. Once finished travel across the US was easy, affordable and millions of people have and continue to do it. Road trips are part of the culture of living in the US. We are now in the second month of the virus and there has been limited driving – which meant oil prices went down and limited number of people buying vehicles in the urban areas. Given the bulk of the population lives in the urban areas, the affects on the auto dealers can now be seen.
In an article by Ben Klayman and Nick Carey of Reuters, Ford in late April announced it had lost $2 billion in the first quarter of 2020. The second quarter is expected to double the loss. The good news is Ford’s Chief Financial Officer Tim Stone believes Ford has enough cash to take us through the end of the year. Ford had raised $8 billion from selling bonds, it used part of its two credit lines of $15.4 billion, suspended its dividend, and slashed all costs it could including cutting salaries of its white collar workers and executives.
The good news is sometime in May all the auto companies Ford, GM, Fiat Chrysler and Tesla hope to renew production. All companies have operations in China and the China operations are open. In China sales of Ford fell 35%, in the US they fell 12.5%.
Ford is hoping demand will be high and something similar to the cash for clunkers program which offered $4,500 in rebates to trade in an older vehicle, perhaps on vehicles at least 10 years old?
Linking to dividend paying stocks, for many years the auto companies help drive the US manufacturing economy and they are still important, just not as important as they once were. It is important to have profitable auto companies, but the economy will not shut down because auto plants are not in operations. If you wish there are YouTube videos on how a F150 truck is made – there are not many people involved. However, most of us need a vehicle to move around in which means a healthy auto industry is needed. Would you trade your vehicle in? maybe yes, maybe no. If that is your answer, this is why you may like the auto companies, but not necessarily be an investor.
There are more questions than answers, till the next time – to raising questions.