Do We Have a Surprise in July's Auto Sales Release?

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

Indicators of economic health have been producing inconsistent results, which has spread waves of confusion in investor circles regarding predictions of a turnaround in the US economy. There is no reason why the market should be dubious of the Fed’s actions regarding tapering of quantitative easing. However, there has been one macroeconomic indicator that has consistently performed well. You may have already guessed I am referring to auto sales.

Expectations

The Street is forecasting a July light vehicle SAAR of 15.9 million units, higher than last year’s 14.1 million and almost in line with June’s run-rate of 16 million. The channel checks suggest that the month got off to a strong start with robust showroom traffic during the July 4 weekend and that the momentum continued for the rest of the month.

Many readers tend to confuse 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.

Trends expected

Auto sales are expected to remain strong after a torrid June. However, investors are advised not to resume frothy views. The fact that consumer sentiment is as high as pre-recession levels has sent bullish signals to the market. The demand for autos continues to stem from interest in not only the large pickup segment, but also in passenger cars and CUVs (crossover utility vehicles). Interestingly, it appears that talk of higher rates is not having an impact on consumer demand for autos. The Street continues to expect sales in the second half of the year at a pace of 15.7 - 15.9 million, and continues to forecast 2013 full-year sales of 15.5 million units. 16 million landmark for 2013 seems highly unattainable given that it will require +16 million SAAR figure for all upcoming months (i.e. July-Dec), which seems pretty unrealistic.

Continued strength is anticipated in the large pickup segment, which is expected to represent 12.3% of sales for the total industry, up 160bp year-over-year and 50bps sequentially. Ford (NYSE: F) and General Motors’ (NYSE: GM) large pickup share are expected to remain largely flat sequentially given modest changes in incentive spend, with Fiat’s Chrysler to sequentially increase share given higher spend.

Expected performance of D-2

GM sales are expected to be up 14%, with cars up 28% and trucks up 7%. GM faces easy comps on the car side where sales were down 4% last July. In the truck category, GM benefited from the ramp up of the production of the newly launched K2xx. It is interesting to note that the new model year trucks were only 10% of overall truck sales last month.

I remain bullish on GM. GM is expected to benefit from its upcoming K2XX full-size pickup truck launch, which will provide a significant boost to earnings over the second half of 2013 to the first half of 2014 timeframe.

Overall, the stock is a cheap buy. The stock is trading at a low 7 times earnings, well below the average consumer goods sector multiple of 13. 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 long been a drag on the company's performance. And above all that, the company is undergoing the biggest product launch since its inception. GM’s current product portfolio is the oldest in the industry. GM’s management believes that it will take another 12 months to turn the whole portfolio over.

Tight inventory a problem for Ford

Ford sales are expected to be up 15%, with cars up 5% and trucks up 20%. Like GM, Ford also benefited from strong pickup demand. However, the tight inventory of some hot selling products like the Focus (37days), the Fusion (48 days) and the Explorer (37 days) weighed on the company’s overall performance. As such, 140bps sequential market share decline for the company is anticipated. This decline is more than GM’s anticipated share decline of 70bps (as a result of slashed incentives).

Like GM, I am also bullish on Ford. The company's future looks bright in regards to its small car sales in the near future, in particular. It is obvious that small, fuel-efficient cars are demanded in higher numbers in recessionary times. According to Ford, its small car sales soared 29% in 2012. The new C-Max hybrid is a big success. Also, Ford’s F-series truck was declared 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 8. The company is actively working to restructure its European operations under the One Ford strategy, which also bodes well for the company.

Toyota Motors – the face of Japanese OEMs

It wasn’t taken as surprise when the final tally for the first six months of the year showed that Toyota (NYSE: TM) edged out General Motors 4.91 million vehicles to 4.85 million vehicles to retain its distinction as the top selling automaker in the world. Toyota’s Camry and Corolla models can easily be called the most popular cars in the market.

The market share for Toyota, unlike its Detroit peers, is expected to rise 30 bps to 14.2% due to elevated incentive spend related to intense competition in the mid-size car segment. Recently, Toyota reported its largest annual profit in five years. Now the company expects its net income to jump 42% through 2014, which shows its phenomenal growth rate.

Things are also getting better in China, where Japanese automakers faced serious hostility from the Chinese consumer base, earlier this year, after the Senkaku-Diaoyu island rift intensified between the two nations. New data shows 16,000 cars were shipped from Japan to China last month– three times what was exported last October. Japanese brands now account for 16% of the market after dipping to as low as 7%

Final word

US auto sales have been a consistent and strong indicator of improving US economy. However, some of the analysts have gone a bit far to suggest 16 million SAAR for the year, which seems far from being plausible. As far as the companies are concerned, I am bullish on all three of them. Cheap valuations and European turnaround for Ford and GM and improving global presence for Toyota helps me to maintain such a point of view.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.


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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