This Auto Stock Will Move Higher

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

It is a good time to buy cars in America. With the economic indicators slowly strengthening, stock market holding up, and interest rates on four-year new-car loans still averaging around 2.7%, people are slowly lining up in front of car dealers to look for new cars. And with automakers from all over the world showcasing new, trendy, flashy cars, the buyers are spoiled for choices.

So, the mood of the industry is upbeat and the going is great for the country’s largest automaker, General Motors (NYSE: GM). The June sales results are just out and let us see what the key takeaways are for GM investors.

Beating expectations

June was GM’s best selling month since September 2008. Its deliveries increased to 264,843 vehicles, much ahead of the roughly 250,000 sales that industry experts like Edmunds.com, Kelley Blue Book, and TrueCar.com expected. The 6.5% year-over-year increase was also no match for the 2.1% gain that the 11 analysts at Bloomberg had predicted. Sequentially, sales were up 4.7%.

GM’s retail sales were also up by an impressive 13.8% year over year in June fueled by double-digit increases in Chevrolet, Cadillac and GMC brands. The company estimates that it has increased its retail market share by 0.5 percentage points year over year.

Last year, GM’s total market share had fallen to its 88-year low at 17.9%, but over the last six months the graph has been heading north. The company currently estimates its overall market share to be in the mid-18% range.

As far as GM’s global peers are concerned, we find that Toyota (NYSE: TM) has made a comeback in the US after lagging others over the past few months. The Japanese auto giant saw a big 9.8% increase over the previous year’s quarter, significantly more than the 7% increase that Edmunds.com had predicted. It sold a total of 195,235 units of which the Toyota division contributed 173,880 units and Lexus division 21,355 units.

Meanwhile, the largest European automaker, Volkswagen (NASDAQOTH: VLKAY), saw its deliveries in the US slip by 3.2% despite the higher incentives that the company has been offering for the last few months. It sold 35,957 units trailing the 50,000 odd expectations of Edmunds.com, Kelley Blue Book, and TrueCar.com.

All three companies are fierce competitors on a global scale and are racing each other to emerge as the world’s largest automaker. Currently, Toyota is wearing the crown after toppling GM last year while Volkswagen intends to occupy the seat by 2018. So, performances in the key US market are very critical for all the three. Volkswagen, which is least focused on the US of the three, plans to ramp up its sales to at least 1 million units to fulfill its dreams.

Trucks continue to rule

GM is a big beneficiary of the huge truck demand in the US, second only to its cross-town rival, Ford. The improvements in the housing and construction industries are driving up truck sales in the country. Riding on this trend, the company increased its combined sales of Chevrolet Silverado and GMC Sierra by 29%. Individually, the Silverado grew by 29% to 43,259 units and Sierra by 33% to 16,568 units.

GM could not have chosen a better time for rolling out its 2014 pickups. Already, some trucks have arrived at the dealers and over 6,000 of them have been sold in June. The company has indicated that the new models are selling out within 10 days of their arrival at the dealer lots.

GM is just about to start its mega television advertising campaign in Texas on the 4th of July, and the national launch will follow in about couple of weeks. Total spending on this promotion is likely to exceed the $300 million that GM spent at the time of the 2007 Silverado launch. Considering everything, it is safe to assume that demand for GM’s trucks will continue.

In the US, the pickup segment is completely ruled by domestic automakers. Toyota has some presence through its Tacoma and Tundra trucks while Volkswagen has no presence in this segment. Toyota is seeing increased Tacoma sales buoyed by the strong truck demand and is waiting for the redesigned Tundra to arrive at dealer lots in September.

Volkswagen is missing having a good pickup in its US portfolio to capitalize on the demand. The company builds an excellent midsize pickup called the Amarok and has recently launched its new concept version in Austria amid rave reviews, but has no plans of bringing its trucks to the US.

Crossovers and small cars shine

GM’s success was not driven by the pickups alone. Sale of crossover SUVs were up 9% while combined sales of mini, small, and compact cars surged 59%. Chevrolet brand’s 66% gain in this category was the most impressive.

The increase was led by Chevrolet Cruze with a 73.2% increase. Chevrolet Equinox also noted its 18th consecutive month of sales increase. The high gasoline prices are a big motivator for car buyers to opt for fuel-efficient smaller cars.

In the luxury segment, Cadillac sales increased by 38% on account of the growing popularity of the new ATS and XTS luxury sedans. However, Malibu, the midsize sedan, continued to slump and was down 32%.

Meanwhile the cars that did the trick for Toyota were the Prius hybrids and Camry compacts. Demand also picked up for the new Avalon sedan and compact crossover RAV. The company will soon launch the much-awaited redesigned Corolla. Volkswagen on the other hand saw strength in Jetta, Beetle, and Passat, but sales of its other cars remained weak.

Looking ahead

The US auto industry is picking up more speed. Analysts were worried when in April the SAAR had fallen to less than 15 million units, but May and June has alleviated concerns. GM had predicted that June SAAR would be around 15.8 million units and most of the other industry trackers are expecting 2013 sales to be over 15.5 million.

GM is well-positioned to capitalize on this demand and would continue to report strong operating performance in the US. Toyota is also expected to do well, although we need wait for the new Golf model to see a significant uptick in Volkswagen’s sales.

GM’s biggest driver would continue to be the pickup sales. The company is also in the process of refreshing its product portfolio and planning to invest $16 billion on its US factories and facilities through 2016. As good news continues to pour in, GM stock is likely to move higher. 

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.


Eshna De has no position in any stocks mentioned. The Motley Fool recommends General Motors. 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!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure