In the market for a used car? You are in luck

A Hertz bankruptcy will flood the market with used vehicles

If you are in the market for a used car, you are in luck. That is, if you have a place to drive to!

According to the Detroit Press, used car prices fell 34.4 percent in April alone. The paper offers solace to it’s readers by mentioning that  used car prices could go up soon due to a shortage of new cars caused by plant closures. The paper however, failed to mention the nearly half a million cars currently sitting ideal on Hertz car lots. With practically no one traveling these days, the need for rental cars has evaporated. Hertz (HTZ) and Avis-Budget (CAR) have suffered the most. Hertz has bigger problems than COVID-19 and that is it’s balance sheet.

There are several stories suggesting a Hertz bankruptcy is around the corner.

Hertz is near bankruptcy

According to Bloomberg, Hertz’s situation is a three-way standoff between Holders of Hertz’s asset-backed securities. They could delay pressuring Hertz to sell down its fleet for a short period of time, but they will need Hertz’s banks to promise to make them whole. The banks, in turn, may not want to take on such a risk, which requires them to bet that either the rental car business or used car prices return to some normal operating level.

A 2-year price chart of Hertz (HTZ), Stockwinners

Meanwhile, controlling shareholder Carl Icahn (IEP) holds a 39% equity stake in the rental company. Bloomberg says that he could put in more money to keep Hertz afloat, but this once again is dependent on a belief that the rental car business will recover to some extent in the very near future.

Carl Icahn

In a bankruptcy, Bloomberg notes, equity holders’ claims would be behind those of creditors, which is not an incentive for Icahn to put in more money at the moment.

Used car prices have fallen sharply due to Covid-19

A Hertz bankruptcy could flood the used car market with several hundred thousand cars, whose value is likely to take a substantial hit at a time when used car lots are already quite full and demand is low.

Companies now deliver used cars to your home for test drives

Bloomberg notes that used car prices dropped 11.4% from March to April, while sales were merely a quarter of pre-outbreak levels.

Meanwhile Hertz has started discounting its cars on its used car lots and Hertz Car Sales. In fact, you can pick up a car, and they will deliver it to your house for a test drive. We have seen discounts as high as 25% on some models.  The company carries brands like Ford, Chevrolet, Toyota and Nissan, to some luxury brands like Audi, Jaguar and Mercedes-Benz.

Cars are discounted by Hertz

One more footnote to this story: auto dealerships usually set their used car prices as a function of new car prices. With most of the domestic auto plants closed, price of new cars (2021 model year) will not be known anytime soon.

Companies in the space include: Copart (CPRT), CarMax (KMX), Carvana (CVNA), CarGurus (CARG), Penske (PAG). AutoNation (AN). 

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Tesla shares lower as sales slowdown

Tesla registrations nearly halved in California in Q4

Tesla’s (TSLA) overall vehicle registrations nearly halved in California during the fourth quarter, according to a Dominion Cross-Sell report, which collates data from state motor vehicle records, Reuters reports.

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Tesla shares lower as sales slow down, Stockwinners

The report showed registrations in California plunged 46.5% to 13,584 in the quarter ended December 2019, from 25,402 in the same period a year earlier.

Model 3 registrations, which accounted for about three-fourth of the total, halved to 10,694.

Tesla Model 3 named Popular Mechanics' Car of the Year
Tesla Model 3 named Car of the Year, Stockwinners

The massive drop comes as tax credit for Tesla buyers ended in 2019. It had fallen to $3,750 at the start of the year and had halved to $1,875 in July.

An existing $7,500 U.S. tax credit for electric vehicles (EVs), which allows taxpayers to deduct a part of the cost of buying an electric car, phases out over 15 months once an automaker hits 200,000 cumulative EV sales, which Tesla hit in July 2018.

Morgan Stanley

Morgan Stanley analyst Adam Jonas downgraded Tesla to Underweight from Equal Weight with a price target of $360, up from $250.

The analyst sees an unfavorable risk/reward at current valuation levels following the stock’s recent rally.

Tesla gets a boost from Bud. See Stockwinners.com
Tesla is expected to rollout is big rig soon, Stockwinners

Further, he believes risks to Tesla’s long-term Chinese business may not be fully appreciated by the market.

Four factors have driven Tesla’s share price up 105% over the last four months, namely stronger than expected global demand for its vehicles, China announcements that show the company’s expansion into the world’s largest electric vehicle market, supportive incentive developments and positive sentiment around its product expansion, Jonas tells investors in a research note.

The analyst, while admitting near-term momentum and sentiment around the stock is very strong, questions the “sustainability of the momentum.” Jonas increased his expectations for Tesla’s core auto business while decreasing his expectations for the mobility business, resulting in the price target raise to $360.

TSLA is down 2.75% to $504.

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Ford announces Safety Recall

Ford issues four safety recalls in North America 

Ford Issues Safety Recall. See Stockwinners.com for details

Ford (F) is issuing four safety recalls in North America:

Ford is issuing a safety recall for approximately 73,000 2015-17 Ford Transit vehicles equipped with a trailer tow module for water intrusion into the module and connector resulting in potential wiring corrosion and damage to the module.

In affected vehicles, water intrusion into the module may result in rapid flashing of the turn signals, loss of the instrument cluster display, loss of heater and air conditioning controls, and loss of multimedia including radio, screens and SYNC.

Ford is not aware of any accidents or injuries associated with this issue.

Ford is aware of two reports of vehicle fires on Canadian fleet vehicles potentially related to this condition. Affected vehicles include 2015-17 Ford Transit vehicles built at Kansas City Assembly Plant, Feb. 3, 2014 to Aug. 2, 2017.

The recall involves approximately 73,443 vehicles in North America with 5,206 in the United States and federalized territories and 8,365 in Canada. The Ford reference number for this recall is 17S34.

Ford recalls F-150s. See Stockwinners.com for details

Ford is issuing a safety recall for approximately 15,000 2018 Ford F-150 vehicles with 3.3-liter engines, six-speed transmissions and column-mounted shift lever for inaccurate gear selection that could result in unintended vehicle movement.

In affected vehicles, rapid movement of the transmission shifter from park to drive may cause loss of PRNDL gear indication in the instrument cluster and momentary engagement of reverse operation before the vehicle achieves forward drive function.

Ford is not aware of any accidents or injuries associated with this issue.

Ford is issuing a safety recall for approximately 15,000 2017 Ford F-150 vehicles with 10-speed automatic transmissions for an inability to shift the transmission using the shift lever.

In affected vehicles, the pin attaching the transmission shift linkage to the transmission may come out. If this happens, movement of the shift lever by the driver will not change the transmission gear, which will remain in the gear it was in when the pin came out regardless of the position of the shift lever. Ford is not aware of any accidents or injuries associated with this issue.

Ford is issuing a safety recall for approximately 30 2018 Ford F-150 vehicles with 3.5-liter engines for possible loss of motive power and engine failure. In affected vehicles, certain cylinder heads manufactured for 3.5-liter engines are missing machined holes intended to supply lubrication to the camshaft-bearing journals.

Ford is not aware of any accidents or injuries associated with this issue.

F last traded at $12.00.


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Delphi Automotive Could be Sold

Delphi is an attractive target for a company that wants to get into autonomous driving

Delphi could be sold. See Stockwinners.com Market Radar for details

Delphi Automotive PLC (DLPH) manufacturers vehicle components; and provides electrical and electronic, powertrain, and safety technology solutions to the automotive and commercial vehicle markets worldwide. It operates through three segments: Electrical/Electronic Architecture, Powertrain Systems, and Electronics and Safety.

Shares have recently moved higher on speculation that the company is a take over target. The Wall Street Journal gave credence to the rumors by publishing an article speculating that Delphi is an attractive take-over target for a high tech firm such as Tesla (TSLA).

Delphi which is now a UK-based company has recently joined forces with high tech firms regarding autonomous driving. It recently teamed up with Israel-based Innoviz Technologies for enhancement of vehicle safety for the self-driving cars. Notably, before tying up with Innoviz Technologies, which develops advanced remote-sensing solutions for mass commercialization of autonomous vehicles, Delphi made a minor investment in that company.

It’s the second company that specializes in light detection and ranging sensors (LiDAR) in which Delphi has made a strategic investment. In 2015, Delphi bought a stake in Quanergy Systems as part of a $90 million funding round.

Earnings

Delphi has reported solid earnings recently. Delphi’s second-quarter revenue rose 3% to $4.3 billion; the growth was 5% when adjusted for currency exchange, commodity movements, acquisitions, and divestitures. That was higher the $4.2 billion that was expected. The company’s earnings from continuing operations checked in with a 13% increase to $1.71 per share year over year. Estimates had called for $1.65 per share.

Delphi now predicts its full-year revenue to check in between $16.85 billion and $17.05 billion, up from its previous guidance calling for $16.50 billion to $16.90 billion. It raised bottom-line guidance also, and expects its full-year adjusted earnings to check in between $6.55 and $6.75 per share, up from its previous guidance of $6.40 to $6.70 per share.


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Fiat Chrysler Could Be Sold to Chinese

Chinese automakers weigh bids for Fiat Chrysler

Chinese automakers weigh bids for FCA. See Stockwinners.com Market Radar for details

Representatives of a Chinese automaker made a bid to purchase Fiat Chrysler Automobiles (FCAUat a small premium over its market value, which was rejected for not being high enough, Automotive News reports, citing sources.

In addition, other executives from large Chinese automakers have been conducting due diligence on a possible acquisition of FCA and FCA executives have traveled to China to meet with Great Wall Motor.

MORGAN STANLEY

After Automotive News reported that Fiat Chrysler had received and rejected a takeover offer from a Chinese company, Morgan Stanley analyst Adam #Jonas says that finding “a Chinese partner could make sense” for the company.

China is the world’s largest SUV market, while the Chinese government is encouraging investments in foreign companies, and investing in Fiat Chrysler would enable a Chinese company to quickly raise its U.S. market share, Jonas wrote.

Moreover, such a deal would enable Fiat Chrysler to avoid antitrust issues that would arise if it combined with another Detroit automaker, the analyst stated. He kept an EUR14 price target and an Overweight rating on the stock.

PRICE ACTION

Shares of Fiat Chrysler (FCAU) are up 9% to $12.65 per share. The issue has a 52-week trading range of $6.0500 – $12.68.


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Morgan Stanley Cuts U.S. Auto Sales

Morgan Stanley cuts 2017 US auto industry sales forecast to 17.3M units from 18.3M units

In Q1 2017, 10.2 million vehicles were sold in the used market, a decrease of 1.3% versus the previous year

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New Car Sales

The US auto industry has witnessed high demand for heavyweight vehicles in the past few years. In 2016, auto sales in the US were at their highest, with about 17.6 million vehicles sold during the year.

However, weakness in the first four months of 2017 also ignited the debate whether US auto sales have already peaked.  US Vehicle Sales at May reported at 16.96M, down from 17.21M last month and down from 17.52M one year ago. This is a change of -1.43% from last month and -3.16% from one year ago.

Used Autos

In Q1 2017, 10.2 million vehicles were sold in the used market, a decrease of 1.3% versus the previous year. Franchise used sales also showed a reduced number of units sold, with a 0.3% decrease versus 2016. Fewer consumers trading in their existing vehicle upon their new purchase could be sidestepping inventory from dealers. The average vehicle on American roads is nearly 12 years old.

The average retail used vehicle sold for $19,227 in Q1 2017, an increase of 2.1% year over year. This record-breaking high can partially be attributed to a higher mix of vehicles being sold that are only 3 years old or newer (53% of sales in Q1 2017) and these 3-year-old vehicles began with much higher MSRPs versus years prior. One caveat is that, while the MSRPs are up and so is the share, these vehicles aren’t retaining nearly as much value as before.

Cautious Comments

Morgan Stanley analyst Adam Jonas made “big” cuts to his US auto industry sales  forecast, reducing his 2017 US #SAAR forecast to 17.3M units from 18.3M units, 2018 to 16.4M units from 18.9M units, 2019 to 15M units from 19.2M units, and 2020 to 15M units from 18.7M units.

Jonas believes the auto cycle may be hitting a point of diminishing returns following 8 years into the biggest cycle on record as used car values erode, pressuring conditions for selling new vehicles, and said new vehicle inventory levels continue to rise.

Additionally, the analyst expects electrical margins to face increasing competition from new entrants and higher development costs.

#SAAR = seasonally adjusted annual rate

He lowered his price targets on 15 companies, cutting his targets for the following companies by 10% or more: Adient (ADNT), Ford (F), Group 1 Automotive (GPI). Specifically, he cut his target on Adient to $85 from $95, on Ford to $9 from $10, and on Group 1 Automotive to $53 from $60. Jonas kept an Overweight rating on Adient, and Underweight ratings on Ford and Group 1. LEAR: Jonas downgraded Lear to Underweight from Equal Weight and reduced its price target to $134 from $149. He expects Lear’s earnings to peak this year and to fall by 20% by 2021.

He also expects its Electrical business margins to disappoint investors due to higher development costs, increased competition, and potential lost market share.

Stocks to Watch:

GM, F, HMC, TM, LEA, TSLA, AN, FCAU, and GPI

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The article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility.