Will U.S. Auto SAAR Reach 16 Million in 2013?

Zain is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Car sales figure, or Auto SAAR (Seasonally Adjusted Annual Rate) as it is called in industry language, plays the role of an essential catalyst for auto stock prices given that it's a clear indicator of demand trends in the industry. Those who have been following the industry know very well that auto sales came in weaker-than-anticipated in both March and April, which sent bearish signals to the market. However, the industry saw a rebound in May. June sales have reinforced this idea that auto industry is well on its way to post strong sales in 2013.

However, the question remains: How strong could sales be? By the start of the year, many were predicting SAAR to be 16 million for the year. Will it be possible? Let’s find out. 

What is SAAR?

Before we discuss the key takeaways of this month’s auto sales, it is important to understand what SAAR is. 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.

Key takeaways from this month’s SAAR were:

Beware of frothiness

June U.S. light vehicle SAAR came in at 16.0 million, ahead of Street consensus of 15.6 million. The SAAR result was above the June 2012 print of 14.4 million and also sequentially ahead of the May print of 15.3 million. The June print was the best monthly SAAR result since November 2007, and occurred without any artificial boosts.

A strong finish to the first half sets up a ~15.7 million - 15.9 million pace in the second half of the year, and hints at a 15.5 million figure for 2013.

However, one should be beware of frothiness. There is no doubt that the June result was healthy and came without any unnatural boosts, as sales benefited from a release of pent-up demand (given a highly aged fleet) amidst overall strong economic conditions (i.e. consumer confidence, housing).

These factors are likely to persist in the second half of 2013, and combined with continued robust sales of large pickups, second half sales are expected at a 15.7 million - 15.9 million pace. Such a pace makes case for 15.6 SAAR for 2013. Beyond this, though, investors are urged not to resume frothy views on the industry, as the Street sees a 16 million-plus pace in second half as unlikely.

Pickup sales remain strong

Pickups continue to lead the way with pricing remaining strong. The large pickup segment was up 23%, solidly outpacing the rest of the industry which was up only 7%. Large pickup mix as a percentage of total sales was 11.8%, up 130 basis points year-over-year, and represented the best June for mix since 2007, when it was 12.6%.

This momentum is expected to persist into the second half given an aged fleet, as well as strength in housing and other industries, such as energy. Perhaps more impressively, the strength in the segment has come amidst healthy pricing.

Did QE tapering risk impact auto sales?

Although there had been concern by some that the pace of sales would moderate after the Federal Reserve signaled it would begin to taper its QE program, the June sales result proved otherwise.

Sales remained strong, as rates for 48 month auto loans remained low at 2.58%, representing a mere 12 basis point sequential increase, while down 125 basis points on a year-over-year basis – indeed, little evidence of a rising rate environment. Talk of potentially higher rates has likely not yet been absorbed by most consumers, and even if it becomes more prevalent, broader economic conditions, as well as pent-up demand and new product offerings are expected to keep new car demand robust.

Company-wise performance

For General Motors (NYSE: GM), June sales came in above Street consensus expectations, partially driven by strong retail sales. GM posted sales increase of 10.6%, above Street consensus of 5.8%. GM truck sales were up 12.5%, above the expectation of an 11.0% increase, while car sales were up 8.0%, well above the expectation of 0.0%. GM large pickup sales were up 29% and commanded 37.4% of the market. GM had 18.9% market share for the entire industry in June, ~45 basis points below the same period last year but up ~140 basis points sequentially.

GM has been undergoing a solid change under the supervision of the determined CEO, Dan Akerson. Also the company is undergoing the largest product portfolio turnaround since its inception. This along with the fact, that the stock is trading at a cheap forward multiple of 7 times earnings makes the stock a Buy.

Strong Fiesta and F-series sales bring in a strong June for Ford

Ford’s (NYSE: F) June sales were up 17.7%, above the consensus of 15.4%. In the month, Ford’s passenger car sales were up 16.5%, above the estimate of +0.0%, led by Fiesta sales, which were up 104.0%. Ford truck sales were up 18.4%, above the estimate of 16.0%, with F-Series sales up 24%, and Edge up 32%. Ford posted a market share of 16.7% for the month, up ~55 basis points year-over-year but down ~30 basis points sequentially.

Ford’s small car sales have been the bright spot for the company. Also, the F-series trucks have been the most sold truck brand in the US. Strong product portfolio along with the fact that the stock is trading at a cheap forward multiple of 8 times earnings makes the stock a Buy. Its One Ford strategy is expected to bring exceptional bottom-line improvement.

A Japanese OEM worth a look

Toyota Motors (NYSE: TM) posted a 14.0% increase, above the expectation of 9.5%. Passenger car sales were up 12.4%, above the estimate of 11.5%, while light truck sales increased by 16.2%, well above the expectation of 7.0%. Toyota share was 13.9% in June, up ~10 basis points year-over-year but down ~50 basis points sequentially.

Toyota has recently been viewed as a favorable stock after the company reported a profitability level (this earnings season) it once used to have prior to the crisis of 2009. Also, the company’s products (Camry and Corolla) have been a super hit in the market. The return of Lexus division to profitability will also help the company to grow.

Final word

The auto industry continues to show strong sales figure propelled by high average of fleet, pent-up demand and strong economic indicators. However, given the current circumstance, it will be far from reality if one deduces SAAR for the year to be more than 16 million units. 

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Zain Abbas has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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