Ford Motor Co. and General Motors have experienced impressive auto loan gains, and they might not lose that tail wind any time soon, analysts from financial services firm Morgan Stanley said.
Adam Jonas and his team explained that financial institutions focused on new-car lending at least two years before moving on to other parts of the economy. The move boosted U.S. auto sales by 60 percent in just a matter of 4 years.
The subprime segment in new-car sales have reached pre-crisis levels, and leasing has also been setting record trends.
Used-car prices look good as well and incentives are rising.
But auto pricing information site TrueCar.com reported that incentives declined by 3 percent in January year over year and 10 percent from December 2013 when dealers worked double time to meet year-end targets. On the other hand, Ford and Honda posted double-digit increments.
Jonas also wrote that their banks team “sees all signs pointing to a stronger consumer, ready to take on more debt.”
The average auto loan amount that a borrower carries has been increasing for 11 consecutive quarters since 2011. The latest report by credit-reporting agency TransUnion showed that the auto loan debt per borrower rose 4.4 percent in the final quarter of 2013 year over year.
The economics and housing strategy teams of Morgan Stanley expect strong job growth with 175,000 to 200,000 additional jobs a month this year. In addition, banks have strong lending capacity.
“If banks and consumers have their way, auto sales can run higher for longer,” Jonas wrote.
But that is not entirely good news for Ford and GM. Even if it means more sales for the automakers, it also implies that “investors might not be willing to pay as high a multiple for Ford and General Motors shares if they believe that the lending will take away from future sales. Ford trades at 8.3 times trailing earnings, while General Motors trades at 13.8 times trailing earnings,” explains a Barron’s report.
Jonas and the other analysts at Morgan Stanley prefer auto-part manufacturers with ties to Europe to GM and Ford, which are more exposed to a “decelerating U.S. market.”