Recent data reveals a glimmer of hope for car buyers who have been feeling the pinch of expensive prices. Automotive data provider Edmunds has released updated financing statistics for the fourth quarter, providing both good news and bad news.
The average monthly payment for a new car has reached a record high of $739, a slight increase from $736 in the previous quarter. Additionally, a record percentage of buyers, 17.9%, are now paying more than $1,000 per month for their new vehicles. This figure has risen from 17.5% in the third quarter and 15.7% in the fourth quarter of last year. Prior to the pandemic, only a meager 5% of car buyers had monthly payments exceeding $1,000.
While these records may not bode well for consumers’ wallets, there is a glimmer of hope in the slowing rate of increase both in the average monthly payment and the percentage of buyers in the $1,000+ payment range.
Fortunately, buyers can take advantage of more attractive deals in the market. The number of car buyers securing 0% APR deals has risen to 2.3% of sales, up from 1.1% in the previous quarter.
One contributing factor to this positive trend is the increase in available inventory. In December, dealers’ new-car inventory surpassed 2.5 million units for the first time since 2021, based on Cox Automotive’s latest report.
There’s also encouraging news regarding used-car prices. In December, unadjusted used-car prices saw a month-over-month decrease of 1.1%. Furthermore, they are down approximately 20% from their peak in January 2023.
The relief in pricing benefits not only consumers but also automakers. Despite increasing payments, Americans purchased more cars last year. In 2023, around 15.5 million new light vehicles were sold, up from approximately 14 million in 2022.
However, if prices continue to rise, this growth is unlikely to persist. The good news is that as interest rates decrease, cars should become more affordable. Cox Automotive predicts continued sales growth, estimating 15.7 million new cars to be sold this year.
Falling Prices: Impact on Auto Makers’ Profit Margins
The automotive industry is poised to experience a potential decline in profit margins due to falling prices. However, financial experts on Wall Street have already considered this scenario and anticipate a moderation in profit margins.
Ford Motor:
Analysts project that Ford Motor’s operating profit margins for 2024 will settle at 5.5%, representing a decrease of 0.4 percentage points compared to 2023.
General Motors:
Similarly, General Motors’ operating profit margins are expected to reach 6.6% in 2024, which is a decline of 0.8 percentage points.
Contrarily, Tesla is predicted to achieve a boost in operating profit margins for 2024, with a figure of 10.4% compared to 9.9% in 2023. However, it is worth noting that the EV manufacturer faced significant pressure on profit margins last year when it aggressively slashed prices. In 2022, the operating profit margins came in at an impressive 17%.
Currently, GM’s stock is trading around $36 per share, slightly lower compared to early July levels as labor concerns began to impact the market. During early November, share prices dropped below $27 due to heightened labor fears but eventually rebounded. In mid-November, GM, Ford, and Stellantis successfully secured a new labor deal that spans over four years and beyond. As a result, the upcoming year is expected to focus more on the industry’s fundamentals rather than labor-related issues.
When it comes to valuation, GM’s shares trade at approximately 3.9 times the estimated 2024 earnings, while Ford’s shares trade at about 6.5 times the estimated 2024 earnings. Ford’s stock price currently hovers around $12 per share, slightly lower than its early July level but it rebounded from a low point of below $10 per share in November, which coincided with the price drop in GM shares.
On the other hand, Tesla is valued as a growth stock and trades at around 63 times the estimated 2024 earnings. Analysts predict that Tesla will sell 2.1 million units in 2024, an increase from the 1.8 million units sold in 2023.
