You know what happens when a car stalls at a one-lane intersection? Every car behind it gets stuck too.
We don't often see that kind of absolute bottleneck in the business world, but when things screech to a halt as they have in 2008 for the automobile industry, you start to get a traffic jam. Only in this case, the gridlock is between the big auto manufacturers and their small suppliers.
What's the Hold-Up?
Suppliers, the selfish bums, don't want to keep taking losses on what little equipment the car-makers are actually buying from them. That reality came to light last week when auto-part manufacturer Dana (NYSE:DAN) sued Chrysler, one of its biggest customers, for not fiscally assisting with the higher costs of commodities and inputs.
Were it just one instance of a supplier getting tough with a customer, it might mean nothing. It wasn't just one case however. We're seeing a lot of similar stories. As such, it makes me wonder how many auto part suppliers are on the brink of breaking. But wait - it gets worse.
Bingo, Bango Sugar in the Gas Tank
Car sales are down. No news there. The question is, when might they start to recover? A little more demand might ease some of the pain for the parts manufacturers. This is where some sugar gets put in your gas tank though.
Analysts suspect August's auto sales will fall again, for the 10th straight month. If the forecast is correct, August of 2008's car sales will be 14-19% under last August's total. Oh wait, that's not even the worst part.
General Motors (NYSE:GM) said in a separate announcement this week that it doesn't expect domestic car sales to rebound anytime this year. In fact, experts think GM's sales could be off by 30% or more. Toyota (NYSE:TM) basically said the same when the company dropped its unit sales forecast by 700,000 cars, to a total of 9.7 million for 2009. Ford's (NYSE:F) could be as much as 22% lower. (Find out what to consider before taking a ride with stocks from this industry in Analyzing Auto Stocks.)
And what does any of this have to do with automotive suppliers? Nothing directly. Indirectly, however, if the outlooks are anywhere close to being right, this bad news could be the final nail in the coffin for some of shakiest of auto part makers. (Find out more about how auto sales can provide valuable information about the economy, check out Using Consumer Spending As A Market Indicator.)
On the Verge of Being Scrapped
You don't have to look too hard to find a troubled auto part manufacturer. The industry has its own junkyard of sorts. However, I wanted to bring to light some of the part maker's problems you may not have heard much about yet. If things do indeed get worse for their primary customers, these stocks could have serious problems (if not terminal ones).
- Hayes Lemmerz (Nasdaq:HAYZ)
The company is scheduled to announced earnings on September 4. Even if they're good (Hayes' Q1 numbers showed "progress"), it may not be enough. The company has lost money since 2005, and has hefty dose of long-term debt on the balance sheet - $604 million in debt to be exact. Even another operating profit may not be enough if it's as wafer thin as last quarter's. There's just no room for error.
- Superior Industries International (NYSE:SUP)
Kudos to the company for getting and staying profitable, but the net and gross are so thin you could use them for a windshield. One flat tire in any given quarter could easily make Superior, well, inferior.
- American Axle & Manufacturing (NYSE:AXL)
Analysts grossly underestimated the losses for the last two quarters, so their expectation for a return to profitability in Q4 of 2008, and all of 2009, doesn't get any traction with me. In short, the company has gotten into the habit of losing money the last three quarters...a lot of it. In the three months ending December 31, 2007, March 31, 2008, and June 30, 2008 it recorded net income of -$25 million, -$27 million, and -$644 million respectively. The cited reason for the loss? Diminished demand from GM (seriously).
I think Johnson Controls (NYSE:JCI) has weathered the storm pretty well, and quite profitably, so too has Autoliv (NYSE:ALV).
That's the oddity here: not all the auto part manufacturers seem to be struggling. There's no smoke and mirrors about it, however, it's clear which companies are the leaders and which are the laggards. The challenge seems to be investors' acceptance of the obvious.
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