Ally Financial Slashes Guidance As Used Car Prices Suffer “Worst Decline In 20 Years”

For those of you holding out hope that the North American auto market is anything but a massive debt-fueled bubble on the verge of imminent collapse, you may want to avert your eyes now.  For the rest of us who prefer to live in reality, as painful as it can be, today’s FY2017 earnings warning from Ally Financial offers a stinging wakeup call to auto investors.

And while Ally’s CEO, Chris Hanley, tried to downplay the company’s 2017 earnings guidance cut to “5% – 15%” on today’s call by saying that it was “generally in line with a 15% EPS growth path that we previously described to analysts and investors,” the market didn’t buy it. 

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And, for an equity market that often, at least to us, seems to be math-challenged, we take some solace from the fact that investors were able to quickly decide that “5% – 15%” earnings growth is not quite the same as “15%” growth. 

Unfortunately for the rest of the auto industry, the reasoning behind Ally’s earnings cut was in no way company specific and was instead attributed to all the warning signs we’ve been writing about for months now, including: sinking used car prices courtesy of a flood of lease returns, spiking consumer delinquencies and rising OEM incentives.

“As mentioned on the last earnings call, the lease portfolio and used vehicle declines and transition of the retail loan book with respect to provision are some things we need to work through, and makes 2017 a bit of a transition year.”

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“As you’ve heard from many lenders, we’re closely watching the environment, and we’ve seen some more noticeable shifts recently.”

“Consumer losses have also been drifting higher, and most notably in lower credit tiers. You’ve heard back from others as well. We have seen some additional deterioration in the first quarter, and we believe that the
delayed tax refunds may have had an impact here.”

“Used vehicle prices continue to decline at a manageable rate, but a bit higher than last year’s pace. We’ve seen manufacturer incentive levels creep up, so we’re watching that closely, and we’ve seen captives continuing to increase their lease presence.”

All of which seems to align perfectly with the data presented in J.D. Power’s latest “NADA Used Car Guide Industry Update” which recently revealed that wholesale prices of used vehicles dropped 1.6% sequentially in February 2017, marking the biggest February decline in at least 20 years.

In a reversal of what typically occurs in February, wholesale prices of used vehicles up to eight years old fell substantially last month, dropping 1.6% compared to January. The drop was counter to the 1% increase expected for the month and marked just the second time in the past 20 years prices fell in February (last years’ scant 0.2% being the other instance).

NADA Used Car Guide’s seasonally adjusted used vehicle price index fell for the eighth straight month, declining 3.8% from January to 110.1. The drop was by far the worst recorded for any month since November 2008 as the result of a recession-related 5.6% tumble. February’s index figure was also 8% below February 2016’s 119.4 result and marked the index’s lowest level since September 2010.

Of course, cars continue to be the hardest hit segment while trucks and SUV’s are holding up slightly better (you know, because oil will trend to $0 over the long-term).

Meanwhile, the OEM’s continue to undermine their own pricing by increasing incentives YoY by 15-25% in order to prop up new car volumes…

…even though it still hasn’t been enough to keep inventory under control.

But, it’s all probably nothing…those tier 2 auto suppliers probably do deserve to be trading at all-time highs.