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Weekly Wrap: Auto Sales Strong; Slow Holiday at Macy's

After a strong finish to 2016, we remain bullish on U.S. auto demand. Plus, our fair value estimate for Macy's is cut, and we’re cautious on Walgreens’ major changes.

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Jeremy Glaser: 2017 kicks off with strong auto sales, disappointing results from Macy's, and Walgreens looking to find its footing, this time on the Morningstar Weekly Wrap.

It was a strong end to the year for the automakers with full-year sales growing 0.3% from 2015 levels. Dave Whiston thinks there is a chance that this is the peak of the current cycle, but that doesn’t mean there will be a dramatic slowdown.

Dave Whiston: Automakers reported a strong finish to 2016 with the December auto sales coming in this week. Seasonally adjusted annualized selling rate, or SAAR, came in at the highest level of the year at 18.38 million. GM led the way with a 10% increase, although a lot of that was some more fleet business in December. For the full year, sales were up only 0.3% percent but to a new record of about 17.54 million, and more importantly, the seventh straight year of growth in the cycle. So it is good news, but at the same time I do think we are really getting to the peak of the cycle right now. Leasing is quite high, used vehicles supply is going to increase because off-lease vehicles supply is going to go from about 3 million last year to about 5 million by 2019. More supply of that will hurt residual values and that should discourages leasing and it should bring some consumers away from the new market and back into the used market. But credit remains available, the fleet is quite old at over 11.6 years, so it is important to understand we aren't peaking and crashing, we are just more sitting along the top for a while. So, I'm still pretty bullish on U.S. auto demand, especially with gas so cheap.

Glaser: It wasn't a happy holiday at Macy's. Comparable sales were down 2% in November and December, management lowered its earnings guidance, and they also outlined 68 store closings which were part of a previously announced plan to close 100 stores. Our analyst Bridget Weishaar is cutting her fair value after this release as she sees these results as more evidence of the firm’s lack of pricing power and its exposure to the e-commerce threat.

Walgreens reported unsurprising quarterly results this week, but our analyst Vishnu Lekraj thinks that investors should be very cautious as the firm tries a new strategy.

Vishnu Lekraj: With what was an inline quarter, Walgreens didn't report anything surprising this quarter. However, the company is in the process of a major change. They are trying to close on the Rite-Aid deal which is still under FTC review, and they are also trying to revamp their store concepts. They are trying to drive a lot sales to beauty products and other products besides pharmaceuticals. We're kind of skeptical about this strategy, and we don't believe it is necessarily going to be a high producer longer term. We believe the stock is fairly valued, and we believe investors should approach the stock with a cautious stance.

And in case you missed it, in an article this week Christine Benz laid out a month-by-month 2017 to-do list for investors.

Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.