US auto sales figures are released on the first of every month. The sales are surging in the last 4-5 months or so because of the easy availability of credit, pent up demand, high average age of fleet in the US, and so on, as seen in the chart below.
However, what remains to be seen is if this momentum will be carried on for the rest of the year. A preview of April sales will help us to understand the answer to that.
Industry context
Goldman Sachs Group, Inc. (NYSE:GS) is forecasting April light vehicle SAAR of 15.2 million units, higher than last year’s 14.1 million but slightly below March’s run rate of 15.3 million. Many readers tend to get confused between the actual sales and the SAAR figure. While the actual sales figure shows us the actual amount of vehicles (in units) that have been sold in a particular month, the SAAR figure depicts the selling rate of vehicles for a particular month. By this I mean that a SAAR rate of 15 million for a particular month indicates that the auto industry is on pace to sell 15 million vehicles on an annual basis.
The combination of still strong replacement demand and favorable financing conditions are helping auto companies to sustain their momentum in auto sales.
The channel checks indicate that while the demand for pick-up trucks is still robust, the Street is seeing a small sequential down-tick in-line with seasonal patterns. Small cars and small utilities seem to be gaining traction among consumers, with their proportion as a percentage of overall sales expected to be up on a year-over-year basis.
Auto Players
GS expects General Motors Company (NYSE:GM) sales to be up 4%, helped by promotions on trucks, sales of which are expected to be up 9%. However, GM car sales are expected to be down 4%. The company is expected to benefit this month from stepped up promotions in the truck category. However, some of the issues related to model transitions that had impacted GM’s results last month (and had caused 200bps sequential share loss) continued to weigh this month as well, and thus GS models only a 60bps share improvement from the March levels.
Overall, the stock is a cheap buy. The stock is trading at a cheap multiple of 7x, well below the average consumer goods sector multiple of 13x. The company is set to grow under the iron-fisted CEO Dan Akerson, who vows to remove the ‘Government Motors’ label from the company. The company is actively restructuring its European operations which have for long been a drag on the company performance. And above all that, the company is undergoing the biggest product launch since its inception. General Motors Company (NYSE:GM)’s current product portfolio is the oldest in the industry. GM’s management believes that it will take another 15 months to turn the whole portfolio over.
GS sees Ford Motor Company (NYSE:F) sales up 15% as tight inventory impacts some categories. The car sales are expected to be up 13% and the truck sales are expected to be up 17%. As seen in the past few months, the tight inventories of certain hot selling models like the Fusion (40 days), Focus (46 days) and the Explorer (32days) continue to impact sales. Ford will remain constrained on the Fusion till the supply from the Flat Rock assembly plant comes online later in the year.
The company is quite bullish on its small car sales in the near future. It is obvious that small fuel-efficient cars are demanded in higher numbers in recessionary times. According to Ford Motor Company (NYSE:F), its small car sales soared 29 percent in 2012. The new C-Max hybrid is a big success. Also, Ford’s F-series truck was declared as the most sold light vehicle in the US with an astounding sales figure of 645,316 units in 2012.
Overall, the stock is a cheap buy given its forward multiple of 8x. In fact, GS sees it as a must buy and places it on its conviction list due to the stock being cheap and the company actively working to restructure its European operations under the One Ford Motor Company (NYSE:F) strategy.
Japanese Auto players – Toyota in focus
Japanese players are expected to lose market share this month due to a sharp cut in incentive spending. However, as stated already, Toyota Motor Corporation (ADR) (NYSE:TM) has been increasing the incentives on its Camry and Corolla.
Overall, Toyota is expected to lose 60 bps of market share (down 13.5%). Toyota has been one of the favorite stocks in the auto industry due to the variety of cars that is has to offer. However, many believed that stock had lost its appeal as the incremental revenues from new Camrys and Corollas had already been priced in the stock. This can be shown from forward multiple of 13x.
