Auto stocks had a rough 2022 start, and a recession has barely been factored in

…Is something you definitely won’t hear in the auto industry. Carmakers reported their second-quarter sales, and nearly all are struggling to produce enough cars.

Blame it on parts shortages…

U.S. car inventory levels in May would have only lasted half a month — compared to the historical levels of 2-3 months.

• Chip shortages led to long delays, which could continue to impact the industry through 2024, per AlixPartners LLP.
• General Motors left 100,000 vehicles sitting around in the second half due to missing chips and parts.

U.S. second-quarter sales: For the 2022 second quarter, carmakers reported sales falling 10-50%.

General Motors’ sales fell 15%, global carmakers (i.e., Nissan and Toyota) performed even worse, while Ford beat the industry with a 1.8% gain in U.S. sales.

Electric truck maker Rivian (NASDAQ:RIVN) was one bright spot — rising 10% yesterday — saying they’ll meet their already reduced 2022 target.

Auto is a tough investment to be in…

Carmakers have high fixed costs, require large investments, and their sales are at the mercy of business cycles. Add supply chain issues to that list.

One of the few things they have working for them is strong demand, and they can’t even meet it. In the past ten years, an investment in:

• General Motors (NYSE:GM) would have given a 7% average annual return.
• Ford (NYSE:F) would have given a 5.6% average annual return.

Both are far underperforming the S&P 500 after losing nearly half their value this year. A recession and rising interest rates haven’t slowed demand yet. So what happens if demand slows?

Investors: Back to the inventory-filled days…

During the 2008 recession, carmakers held too much inventory and were forced to give steep discounts. Ford’s stock fell 80%+ in 18 months, and General Motors filed for bankruptcy in 2009.

• Auto manufacturers have the opposite problem this time: too much supply and difficulty meeting demand.
• Demand is strong so far, but consumer spending could quickly reverse if economic conditions worsen.

In recent weeks, analysts lowered price targets on several auto stocks, including General Motors and Tesla — forecasting reduced profits when they report earnings in the coming weeks.

It’s uncertain whether a recession is priced into auto stocks yet — but if not, expect returns to get even worse.