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Ugly Auto Sales Are Coming

Auto stocks have come a long way from the pain of the Great Recession. If you’ll recall, Ford (F) reported a record loss of $14.6 billion and both General Motors (GM) and Chrysler both declared bankruptcy during the depths of the financial crisis.

Now, Detroit is humming along. GM and Ford have seen a resurgence as U.S. auto sales have rebounded to what should be 16 million vehicles sold in 2014 — up dramatically from less than 11 million vehicles in 2009.

But while the recent outlook for auto stocks has been decent, long-term I have serious concerns about the viability of the industry as cars fall out of favor.

As I outlined in a recent MarketWatch column, risks include:

Demographics: The University of Michigan Transportation Research Institute estimated that in 2010, 69.5% of 19-year-olds in the U.S. had a driver’s license, compared with 87.3% in 1983. Younger Americans simply aren’t driving — both because they prefer mobile devices as a path to “freedom” and because they simply don’t have the cash to buy cars.

Urbanization: The end of suburbia might be upon us as Americans prefer living in convenient urban locations, which aren’t as car friendly. This trend is lifting public transportation and car-sharing services like Zipcar — now an AvisBudget (CAR) subsidiary — and ride services like Uber … but will weigh on auto stocks.

China: Some think that China is a never-ending boon to automakers. But concerns over pollution have resulted in anti-car policies in many regions. In Shanghai, new license plates are auctioned off for an average of $13,400 per tag each month. The tactic is meant to limit the number of vehicles on clogged Shanghai roadways. Other cities like Beijing, Guangzhou and Guiyang also have policies meant to limit vehicle ownership. Between the practical hurdles of poor Chinese affording vehicles and the regulatory bottlenecks on ownership, there might not be as high of a ceiling for auto sales in Asia as automakers hope for.

Admittedly, auto sales aren’t going to zero tomorrow and car companies should be around for a long time. But those who ignore these big-picture, long-term trends could be disappointed with the performance of their auto stocks as auto sales slow over the coming years.

For more details, check out a recent interview I gave with WBAL Baltimore on the topic:

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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