Automakers and Loan Companies Fret as Auto Debt Tops $1 Trillion and Delinquencies Rise
Americans in the U.S. owe a collective $1.07 trillion in debt on their vehicles, according to Experian, a financial-services company that tracks and reports credit trends for consumers and companies. The amount is a record high, and as interest rates increase, and monthly payments become less affordable, it could create headwinds for lenders, including Ally Financial, and automakers, including Ford and General Motors.
Auto loan demand has been an important source of revenue for lenders and automakers. However, rates are increasing now that the Federal Reserve is tightening interest rates, and that could pose a problem for cash-strapped consumers. According to Bankrate, the average interest rate on a 60-month new-car loan has increased to 4.44%, from 4.27% in the middle of December. Experian reported that the average new-car loan in the fourth quarter increased to $30,621, a record, and that average monthly car loan payments climbed to $506 per month, up from $493 per month the year before.
Increasing costs are forcing borrowers to embrace auto loans with longer financing terms, too. About 32% of borrowers chose a 73- to 84-month loan last quarter, up from 29% in Q4 2015. Despite stretching payments out over more months to lower the monthly bill, the percentage of delinquent auto loans is on the upswing. Across all auto loans, 30-day delinquencies edged up to 2.44% in Q4 2016 from 2.42% in Q4 2015, and 60-day delinquencies edged up to 0.78% from 0.71% year over year. According to Bloomberg, delinquencies among borrowers with low credit scores are the highest since 2009.
A low-interest-rate environment has been very good to lenders and automakers, and rising rates could put a crimp on their revenue growth. This week, major auto lender Ally Financial issued guidance for its earnings per share (EPS) growth of between 5% and 15% in 2017, a wide spread that is weighed down in part by an increase in its provision for bad debt. In 2015, Ally Financial’s loans to people with credit scores south of 660 represented about 45% of its loan origination, and last year, that figure fell to 41% as management began to limit its exposure to risky borrowers. Despite tightening standards, Ally Financial expects losses on loans to increase to between 1.4% and 1.6% of its portfolio, up from 1.24% in 2016. Ally Financial has $66 billion in retail auto loans outstanding, and it originated 5% of all auto loans last year.
The dynamic could also strain Ford and General Motors, both of which have seen revenue climb significantly over the past few years. If interest rates climb and lending standards tighten, automakers may be forced to boost profit-busting incentives or take on more risk in their own lending operations. It is possible we are already seeing that happen. According to Ward’s Auto, the daily sales rate of U.S. light vehicles slipped 1.4% year over year in the first two months of 2017. The rate at Ford fell 2.6% from last year, while the rate at General Motors inched up just 0.3%. A double-digit percentage drop in car sales is being offset by strong light-truck sales right now, but there is no guarantee that will continue.
It is also potentially concerning that market share for captive financing companies has increased to 28.4% from 27.8% year over year, and that Kelly Blue Book estimates that incentives into the end of last year were 20% to 25% higher than normal.
The Federal Reserve has indicated that rates could increase by an additional 0.50% this year, and if they do, then average monthly payments for borrowers will likely head higher. With consumers already saddled with more than $1 trillion in auto debt, and a less favorable lending environment in the works, it could become tougher sledding for companies that rely heavily on auto sales.
Citations
- http://bit.ly/2o0ByzR Motley Fool
- http://usat.ly/2cz85Yz – USA Today
These Days, Small is Beautiful in the Cosmetics Business
More than half a century ago, Revlon founder Charles Revson famously described the true business of cosmetics makers: “We sell hope.” Today the same could be said about what the large, established beauty houses see in small, social media-driven makeup companies. The prospect of wooing the millions of millennials who base their makeup and skin-care purchase decisions on online likes, follows, and reviews from influencers has sparked a feeding frenzy for small, hip brands. The 52 acquisitions in the beauty and personal-care industry last year were the most in a decade, and some of the hottest targets were private brands with massive social media fan bases, according to investment bank Financo LLC.
If there is any slowdown this year, it will only be because demand for buyout candidates outstrips supply, says Colin Welch, a managing director at TSG Consumer Partners LLC, which bought a minority stake in a little line called IT Cosmetics in 2012. The company reached sales of $182 million last year, when TSG orchestrated its sale to L’Oréal SA for $1.2 billion. “There’s a lot of capital chasing investments,” says Welch.
Big cosmetics companies used to turn up their noses at any acquisition with less than $100 million in annual sales, says Vennette Ho, a managing director at Financo. Now there is practically no bottom because revenue can climb fast if a line suddenly catches fire in the digital world. That is because millennials and teens are so receptive to social media tips on what to buy, and because word-of-mouth is the primary factor behind as much as 50% of their purchasing decisions, according to McKinsey & Co.
These days, “consumers are gravitating to smaller brands with innovation,” Ho says. They also want what is called “authenticity,” which roughly translates into an interesting backstory from a photogenic founder who applies the personal touch. At Huda Beauty, founder Huda Kattan, an Iraqi American who lives in Dubai, stars in video tutorials demonstrating how to use her latest products. She also answers questions from customers on her blog, beginning her responses with “Hey honey.” Her Instagram followers exceed 18 million. “Authenticity is what makes it work,” says Claudia Soare, President of Anastasia Beverly Hills, the celebrity salon empire her mother, Anastasia Soare, founded in 1997. Started in a rented room in Los Angeles, Anastasia now operates Brow Studios in 80 Nordstrom stores nationwide.
Anastasia Beverly Hills—a favorite of many A-listers including Kim Kardashian—saw its U.S. online sales grow by an industry-leading 150% in 2016. What is more, it is No. 1 in social media value in the sector, as calculated by Tribe Dynamics, an internet branding company that tracks tweets and retweets, YouTube hits, and more to determine the coolest of the cool brands. One measure is Instagram followers: Anastasia has more than 13 million. That performance has put the company on the wish lists of many mergers-and-acquisitions professionals, according to Martin Okner, a board member of the Association for Corporate Growth, a private-equity industry group. But Anastasia Soare is having none of it, saying she regularly rebuffs suitors and does not plan to stop. “We don’t need to answer to anybody,” she says. One reason for the aversion to selling out: “The minute you introduce a financial backer,” says daughter Claudia, “we’ll never be able to deliver the same kind of feeling. The original brand will get diluted. It’s inevitable.”
Private equity firms and big beauty conglomerates are not likely to stop trying to snap up small fry, however. “The beauty companies have become extremely acquisitive because their portfolio brands have been tired and dated,” says Ryan Craig, a partner at Bertram Capital Management LLC, which last year sold a majority stake in Paula’s Choice, a skin-care and cosmetics maker, to TA Associates Management LP, a Boston-based private equity firm. “That has left an opportunity for a lot of small, nimble brands to attract younger consumers because they offer something new.” One example: In January, Shiseido Co., Asia’s largest cosmetics maker, acquired MatchCo, a 10-employee outfit that developed a smartphone app which scans a person’s skin tone to formulate a customized foundation for the face.
Even venerable Estée Lauder Cos. has joined the buying frenzy. Last year it shelled out $1.5 billion—its biggest acquisition deal ever—for Too Faced Cosmetics, whose products are a big hit with women under 40. It also snatched up Becca Cosmetics, active on Instagram and Facebook and known for its shimmery highlights and appeal to young women of color, for a figure estimated to be more than $200 million. Says Andrew Crawford, a Managing Director at private equity firm General Atlantic LLC, which acquired a majority stake in Too Faced a year before selling it to Estée Lauder: “Success leads to a lot of interest.”
Citations
- http://bloom.bg/2nx5SEg – BusinessWeek
- http://on.ft.com/2cpjFUF – Financial Times
The Good News Is . . .
- The Commerce Department says orders for durable goods rose 1.7% in February and an upwardly revised 2.3% in January. Orders so far this year are running 1.6% higher than in the first two months of 2016. Orders for commercial aircraft saw a 47.6% jump in February. Orders also rose for primary metals. The report indicates that manufacturers are recovering from a difficult period that began in 2015 as oil prices fell and the dollar strengthened.
- Nike Inc., a leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories, reported earnings of $0.68 per share, an increase of 23.6% over year-earlier earnings of $0.55 per share. The firm’s earnings topped the consensus estimate of analysts by $0.15. The company reported revenues of $8.4 billion, an increase of 5.0%. Management attributed the results to strength in its Nike and Converse brands, as well as reduced selling costs.
- Vodafone, a British telecommunications company, announced that it was combining its Indian unit with Idea Cellular, a local operator, in a $23 billion deal that would create one of the world’s largest cellphone providers, with roughly 400 million subscribers in India. The country’s cellphone industry is undergoing a drastic overhaul, as more Indians make the digital leap. In recent years, the use of smartphones, which can be bought for as little as $20, has ballooned, and Indians have rushed to digital services like Google and Facebook. Under the terms of the deal, Vodafone would retain a 45% stake in the business, while the Aditya Birla Group, Idea’s majority shareholder, would hold a 26% stake. Idea’s other shareholders would own the remaining stock.
Citations
- http://on.mktw.net/2n1nm8A – MarketWatch
- http://cnb.cx/2lwnm3s – CNBC
- http://bit.ly/2o0BOPh – Nike, Inc.
- http://nyti.ms/2ng31gU – NY Times Deal
Planning Tips
Tips for Reducing the Impact of Taxes in Retirement
If you are near retirement, you may be looking forward to the day when taxes get simpler. You could be disappointed. When you transition from working mode to retired mode, the tax return can change drastically. Of course, everyone’s tax situation is different, but below are some tax issues you may encounter and ways to lessen their impact. It is important to check with your tax advisor to determine the most appropriate strategy for your current financial situation.
Deductions may disappear – If your children are grown and your house is paid off, you will no longer get tax breaks for dependents or mortgage interest. And you will no longer be able to get a tax break for contributing to a 401(k) or IRA. Your deductions for charitable contributions may decline, too, as many retirees tend to volunteer more than donate. And starting with the 2017 tax year, taxpayers age 65 and older will be able to deduct only the amount of medical expenses exceeding 10% of adjusted gross income, up from 7.5%. Take advantage of available tax breaks while you still can. Consolidate any elective medical expenses into one year to meet the higher health deduction. During your last year of working, try to contribute as much as you can to your retirement plan.
You may end up in a higher tax bracket – Many retirees drop into a lower tax bracket when they stop working. But after age 70 ½, they must start taking minimum distributions annually from tax-deferred accounts such as a 401(k) or traditional IRA. These distributions—on top of other income—can push retirees into a higher bracket. For example, singles with taxable income of up to $37,950 —or couples filing jointly with $75,900—are in the 15% tax bracket this year. Throw in several thousand dollars from a required distribution, and that extra income will be taxed at 25%. Consider taking distributions from tax-deferred accounts while still in your 60s and in a lower tax bracket. With care, you can steadily withdraw money and stay within your current tax bracket. Alternatively, you might choose to convert some tax-deferred dollars into a Roth IRA. You will owe income taxes on the amount converted, but thereafter Roth withdrawals are tax-free. And Roth IRAs do not have required distributions.
Your Social Security may be taxed – Many retirees are surprised to find that their Social Security benefits are taxable if their income is above a certain level. And it does not take much income to trigger the tax. Under the IRS formula, half of Social Security benefits are added to other income a retiree receives. If the amount exceeds $25,000 for singles or $32,000 for married couples filing jointly, a portion of the benefits will be taxed. Tapping tax-deferred accounts earlier in retirement will reduce future required distributions, and may provide the money to live on so you can postpone taking Social Security benefits. Your benefits will increase 8% for every year up to age 70 that you postpone benefits beyond your normal retirement age (66 to 67 for most people).
You may have to pay taxes quarterly – Your employer withholds taxes from your paycheck and forwards the money to Uncle Sam. That is not the case in retirement, so you may have to pay estimated taxes quarterly. You may be able to avoid quarterly payments by asking your brokerage or former employer to deduct taxes for you from your IRA withdrawals or pension check. Make sure the withholding is enough to cover your tax liability.
Your finances may become more complex – If you have been a good saver, you likely have accumulated multiple accounts and need to withdraw that money in the most tax-efficient way. Make this job easier for yourself by consolidating accounts. And just before retirement or during the first year, see a tax professional for advice.
Citations
- http://bit.ly/2nx0DEF – US News & World Report
- http://bit.ly/2ng3yj0 – Bankrate.com
- http://bit.ly/2mAs6py – AARP
- http://fxn.ws/2nlyJuW – Money
- http://fxn.ws/2nlyJuW – Fox Business
