AutoNation, Inc. (AN), Penske Automotive Group, Inc. (PAG): Dealer Data Can Help Anticipate Slowing Auto Sales

Since vehicle sales are seasonal, it’s important to look at comparable quarter over quarter relationships. The most recent second quarter data shows:

Source: Company 10-Q SEC filings.

What does the information suggest?

The figures seem to propose that dealers generally prefer to hold around 58 days to 60 days of sales in inventory at the end of their 2nd quarter.

The rise toward mid-60s days of sales in dealer stock in 2008 might have hinted toward the weakening of demand that would lie ahead. Conversely, the meaningful drop toward, and even below, preferred lower-end inventory levels in 2010 and 2011 could have suggested the industry was overly pessimistic, and a rebound might be forthcoming.

Since the recent recession stymied many new car buyers and created significant pent up demand, car sales may continue to improve for some time. But with second-quarter inventories again approaching the mid-60s days of sales figure, investors might want to tread carefully. At a minimum, since the entire auto food chain, from dealers, to car makers like Ford and General Motors, to parts manufacturers like BorgWarner and Dana Holdings, are all near 52-week highs, you might want to make sure you’re fully comfortable that optimism in the industry isn’t excessive before you take a long position.

Conclusion

The auto industry often gets overly enthused during good times, and overly pessimistic during bad. New vehicle sales peaked at a 17 million annual rate in 2005, then dropped to around 10 million in 2009. Now, with the figure topping 16 million, it’s possible that the easy gains have already been made. Plus, with auto dealers’ days of sales in inventory near uncomfortably high levels, you might want to proceed with caution if you’re considering investments in this sector.

The article Dealer Data Can Help Anticipate Slowing Auto Sales originally appeared on Fool.com is written by Bob Chandler.

Bob Chandler has a short position in Ford and BorgWarner. The Motley Fool has no position in any of the stocks mentioned.

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