5 Reasons to Fear Auto Stocks

5 Reasons to Fear Auto Stocks
Problems in Japan still loom large
By Susan J. Aluise

Despite recent earnings gains and strong March vehicle sales, investors should be cautious with automaker stocks right now. Shares of Toyota (NYSE:TM) and Honda (NYSE:HMC) are the most vulnerable right now, because of the loss of production in Japan.

Even with less exposure to Japan, Ford (NYSE:F) and General Motors (NYSE:GM) face headwinds, too.

Investors are still feeling a lot of love for the auto sector, especially when considering the sector is up more than 50% from a trough last July. From a business perspective, the automakers are still doing a lot of the same things that have lifted their earnings over the past few quarters. So why should investors consider a retreat from such a solid position?

Here are five reasons to consider taking a deep breath: 

1. Share prices don’t yet reflect the full impact from the March 11 Japan earthquake, tsunami and nuclear disaster. That’s what prompted a Citigroup analyst to issue a sell order Friday on Toyota and Honda. Although both companies plan to restart halted assembly lines in Japan next week at about 50% of their planned levels, the specter of additional plant closures later in the month remains.

2.Thursday’s 7.1-magnitude aftershock in northern Japan triggered massive power outages, further complicating the industry’s ability to come back from the initial disaster. While Toyota and Honda said they had factored this new quake into their plans to restart production, some key suppliers were affected by the new seismic activity. Blackouts from the new quake caused Renesas, a major supplier of microcontroller chips to the automotive industry, to shutter four plants in the northern part of the country.

3.The Japan disaster is wreaking havoc with Honda and Toyota’s production and product launch plans. The companies already have had to postpone new launches — including the Prius hybrid wagon and minivan. The crisis already has lost Toyota 260,000 vehicles that should have been produced between March 14 and Friday, during which time the company was forced to close 18 plants. Advanced Research Japan analyst Koji Endo said it may already have cost Toyota $1.2 billion for the fiscal year that ended March 31, and could cost the company as much as $2.4 billion this year.

4.Parts shortages are everybody’s problem. “The full extent of damage to the supply chain and production disruption from the power outages are being underestimated by the market, and we would avoid the sector as things stand,” Citi analyst Noriyuki Matsushima noted to clients. Automotive industry researchers say U.S. automakers rely on Japan for 14% of their parts, and lean inventories leave little room for supply disruptions. What’s more, those disruptions could hit popular hybrid and electric vehicles hard. For example, Sanyo in Japan makes the batteries for Ford’s popular “Escape” hybrid.

5.Rising fuel prices always have some impact on the auto industry, and with oil bouncing up over $110 a barrel this week, the industry will feel the pain. Making matters worse, the budget deadlock between Congressional Republicans and Democrats that threatens to shut down the government at midnight Friday is wreaking havoc on the dollar.