Forecasts are upbeat for the U.S. automotive sector, with OEMs and suppliers alike projected to benefit from slow but steady increases in sales over the next several years . And that outlook bodes well for trucking companies that serve the auto industry-- as freight volumes from this key industrial segment should witness similar improvements.
Fitch Ratings expects credit profiles in the U.S. auto sector will continue to strengthen in 2011, giving a “positive” outlook for both original equipment manufacturers (OEMs) and suppliers next year, as projected global economic growth should drive opportunities for further improvement in free cash flow, leverage and liquidity.
“Over the past year, both autos and auto suppliers experienced a relatively strong reversal of the negative trends that plagued the industry during the prior two years,” said Stephen Brown, Fitch’s senior director. “If these trends persist, it is likely that positive outlook revisions, and potentially, rating upgrades, will be seen throughout the auto sector in 2011.”
Although sales in the U.S. are expected to remain below pre-recession levels over the next several years, the substantial restructuring undertaken by domestic OEMs and suppliers during the downturn has greatly reduced the level of U.S. light vehicle sales needed to break even on an operating basis, he explained. That in turn allows many suppliers to post record or near-record margins even in what remains a relatively weak U.S. market.
Indeed, J.D. Power & Associates added that the pace of new-vehicle retail sales this December –expected to come in at 936,300 units, up 19% from the same month in 2009 – is significantly beating expectations, driving a strong close to a challenging year of recovery. The firm noted its analysis is based on real-time sales data pulled from over 8,900 new vehicle dealerships across the U.S.
"Even with the possibility that sales … may be affected by winter storms, the strength in sales during the second week of December are expected to continue through the rest of the month," said Jeff Schuster, J.D. Power’s executive director of global forecasting. "As a result, it appears that 2010 will end on a high note."
Total light-vehicle sales for December are expected to come in at 1.13 million units, which is 14% higher than December 2009 and represents a seasonally adjusted annualized rate (SAAR) of 10.8 million units. For 2011, J.D. Power's forecast remains at 10.4 million units for retail sales and 12.8 million units for total sales.
Fitch cautioned however that, although worldwide auto demand will be up over the 2010 level, sales growth in 2011 will be uneven across regions. Demand growth in the U.S. and developing markets will offsett continued declines in Europe. Even in the U.S., however, light vehicle sales in 2011 are expected to remain well below pre-recession levels.
Still, with the industry's lower cost structure and higher demand, Fitch expects free cash flow to grow for OEMs and most suppliers, which will allow further repairs to balance sheets that were damaged during the recession. In addition to reducing debt, over the past year ,several issuers were able to take advantage of the relatively strong fixed income market to refinance their debt, reducing interest costs and pushing out near term maturities.