Ford Motor Company (F), General Motors (GM) Watching Subprime Auto Market
The latest data on subprime auto lending paints a mixed picture of the auto industry. The stocks of auto giants Ford Motor Company (NYSE: F) and General Motors Company ( GM) are trading at some of the lowest earnings multiples in the stock market on fears that an auto industry downturn is imminent.
However, a new report from Experian suggests the auto market is actually growing and stabilizing.
According to the report, the percentage of total auto loans going to subprime borrowers with credit scores below 620 is 10.7 percent, its lowest level since 2012.
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"For some time now, the story has been focused incorrectly on the rise in subprime lending," Experian senior director of automotive finance Melinda Zabritski says. "But the data over the last several quarters has shown that the entire market is growing, not just subprime."
While the Experian report focuses on the declining percentage of borrowers with subprime credit ratings, the Federal Reserve Bank of New York recently reported that total outstanding subprime auto debt has swelled to an all-time high of more than $282 billion. In addition, 2.4 percent of those subprime auto loans are now at least 90 days delinquent, a threshold classified as "serious."
But so far this year, used car prices have defied expectations and held up relatively well, suggesting auto buyers are having no problem finding financing. Manheim reports that used car prices were up 8.1 percent in the month of October.
Total light vehicle sales are down 1.5 percent year-to-date. Through November, GM's sales are down 1.2 percent and Ford's sales are down 1.1 percent in 2017. While GM and Ford may not be directly tied to the auto finance market, a potential breakdown in the auto credit market could trigger a major downturn in auto sales.
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Companies that specialize in auto finance could be hit even harder than manufacturers. Earlier this year, Height Securities analyst Edwin Groshans said used car prices could soon start to depreciate. "The combination of lower used car auction prices and weakening credit quality will manifest in the operations of auto finance companies with subprime lending concentrations," Groshans said.
Groshan's said companies which are particularly exposed to the subprime auto lending market include Credit Acceptance Corp. ( CACC), Santander Consumer USA Holdings ( SC), Ally Financial ( ALLY) and Capital One Financial Corp. ( COF).
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at wpd@tradingcommonsense.com.
