Don’t be spooked by U.S. auto sales
GM, Ford are focusing on more profitable retail consumers, and that strategy is paying off
The auto market meltdown that occurred during the Great Recession presented an opportunity for investors with a little insight.
U.S. auto sales dipped to a record low of nine million in February 2009, but as is often the case, a reversion to the mean scenario played out. New vehicles sales hit a record of 17.55 million in 2016, and appeared firmly in the 16 million to 18 million range. That’s where new vehicles sales had been for much of the period after 2000, and averaged approximately 15.5 million between 1993 and 2017.
But with total U.S. vehicle sales falling more than expected to 16.5 million in June — the lowest level since February 2015 and the fourth consecutive monthly decline — concerns are starting to seep back in.
Year-to-date, sales are down 1.6 per cent on a seasonally-adjusted annual basis. But rather than focus on the weak headline numbers seen since early in 2017, the trend in retail sales, which has been significantly stronger.
Ryan Brinkman, an autos analyst at J.P. Morgan, reminded clients that the timing of fleet sales is typically lumpy, and they are also less profitable than retail sales because fleet buyers can negotiate bulk purchase discounts. He noted that industrywide fleet sales fell eight per cent in June, retail sales were essentially unchanged.
General Motors Co. and Ford Motor Co. are focusing on more profitable retail consumers, and that strategy is paying off, as their average transaction price (ATP) gains are outpacing the industry’s rise. Ford’s ATPs rose $1,800 US year-over-year, compared to a still-impressive $500 US gain for the broader industry.
Keep in mind that ATPs are calculated after factoring in incentives, which should also help calm nervous investors.
Brinkman pointed out that the rate of incentive increases appears to be slowing (+11.8 per cent in June), and although they remain elevated when compared to inventories, the analyst attributed this almost entirely to GM’s decision to build inventory ahead of planned downtime before new vehicle launches.
“In short, industry fundamentals remain robust, particularly as relates to the all-important trend in retail demand, for which we believe the likeliest future direction remains a rough plateauing, suggesting a buying opportunity in many automakers and auto parts suppliers,” Brinkmann said.
His favourite names include “highly cyclical” GM, American Axle & Manufacturing Holdings Inc., and Magna International Inc.
Industry incentives as a percentage of ATPs were 10.8 per cent in June, compared to 10.7 per cent in May and 10.0 per cent a year ago, according to TrueCar. com.
Joseph Spak, an analyst at RBC Capital Markets, believes this suggests automakers do need to put more money on the hood these days, but spending has stabilized. He think that could signal more discipline, with automakers recognizing “the incremental return for the incremental incentive dollar may not be there.”
Michael Gregory, deputy chief economist at BMO Capital Markets, also noted that the lingering sluggishness in auto sales could be a reflection of things other than payback for the yearend sales surge to decade-plus highs. He believes it could also be about getting margins back.
“Reports say the automakers aren’t using sales incentives as aggressively, or offloading excess inventories (at a song) to rental companies and other fleets, as much as before,” Gregory said. “Of course, one judges that the industry will tolerate braking sales for only so long before the incentives start revving again.”