The US auto sales finished 2012 on a high note as the auto industry completed its strongest year since 2007. The auto sales rose by 15 percent YoY to 1.14 million vehicles, easily crossing the consensus estimates of 1.11 million vehicles. The US SAAR accelerated to 15.46 million units as the sales rebounded from a disappointing 14.3 million mark achieved last month. Most of the people believe that the strong results for this month are because of Hurricane Sandy. The natural disaster disturbed the overall business activity in the Northeast region of the country and therefore many buyers could not make it to the dealers' showrooms in the last week of October. Therefore, it was expected that some of October's sales would be pushed into November. However, I believe that 'Hurricane Sandy effect' was not the only factor for stronger-than-expected November sales. According to the OEM estimates, only demand for around 0.4 million units was actually pushed into November that should have been executed in October (had the natural disaster not taken place).
A pent-up demand for auto vehicles, easing of credit conditions and greater confidence on the part of lenders and consumers were some of the other factors that also contributed to a strong SAAR for November. I believe that the pent-up demand is being generated because of the advanced age of many vehicles on the road. Morgan Stanley estimates the current average age of a car (on the road) in the US to be 11 years. This is way more than the 20-year historical average of 8 years. Therefore, the demand for cars is also being driven by the need to replace the aging vehicles.
A recovery in the housing sector has also helped the auto sales to improve. Construction spending, a key barometer for sales of large pick-up trucks, increased by 1.4% YoY in October.
The bears often come up with a point of view that the auto sales growth has come around because of an increase in the incentives provided by the OEMs. However, this was not the case in November as the incentives declined by 5% YoY.
Fleet Sales versus Retail Sales
Often, the readers have been confused by the difference between the retail and the fleet sales, and therefore they have been unable to realize the importance of strong retail/fleet sales. Most automakers define a fleet sale as sales of vehicle to a business that owns at least 15 vehicles or a business that purchases 5 new vehicles every year. On the other hand, a retail sale is simply selling a single vehicle to a regular customer who comes to buy a car/vehicle.
Therefore, we can already sense that a fleet sale will come with all the aspects of a regular wholesale transaction. By this I mean, a fleet sale will be accompanied with volume discounts, special off-the-book discounts, special off-the-book financing rates and so on. Therefore, for a dealer, a retail sale will be preferred as compared to a fleet sale.
Therefore, investors in the auto industry were delighted to witness a surge in the retail sales. The retail sales surged to 13.3 million from 12.4 million last month (7.2% increase M-o-M). On the other hand, the fleet sales remained flat MoM. A surge in the retail sales is also an indicator of rising consumer confidence in the region. The following graph shows the performance of the consumer sentiment index (gauged by University of Michigan) over the last 12 months:
US November SAAR Highlights
The SAAR of 15.46 million came out to be much more than the forecasted range of 14.8 million - 15.3 million. After Hurricane Sandy, most of the October sales were expected to be pushed into the month of November and December. Also, the cars damaged in the natural disaster had to be replaced. According to an estimate, around 250,000 cars were damaged in the storm. Hurricane Sandy hit the US in the last week of October. According to Edmunds, on a historical basis, around 30% of the auto sales in October take place in the last week of the month.
However, as already mentioned, it will not be true if one concludes that the boost in November sales came just because of the "Sandy factor'.
Performance of different companies
Following table shows the YoY performance of different automakers:
General Motors (NYSE:GM)
Not a single major auto manufacturer saw a decline in its sales on a YoY basis. This news sent bullish signals in the market. Apart from the Detroit-3 (Ford, General Motors and Chrysler), carmakers from Asia and Europe also sell their products in the US. Following chart shows the market share of different continents in the US auto industry:
Following table shows the change in market share of major OEMs in the US in November:
Japanese Auto manufacturers
Among the major OEMs, Honda Motors came at the top by posting a strong YoY gain of 39%. The company's Honda CR-V is a hit with the consumers, as the sales of this brand shot up by 36% YoY.
Toyota Motors displayed a 17% gain in sales on a YoY basis. Corolla and the light-truck sales drove a major chunk of the sales. Nissan displayed a 12.9% gain in the sales. However, it was the only Japanese OEM (major) to lose market share in the US on a YoY basis.
The news of an earthquake of 7.3 magnitude in Japan this Friday has sent bearish signals in the market. The Japanese stocks suffered from a heavy blow last year when the tsunami in Japan squeezed their supplies.
European Auto manufacturers
From the table, we can see that no European auto maker currently comes in the top seven spots in the US. This time around, BMW posted its best sales month ever. The company delivered 36,461 BMW and mini-vehicles. Volkswagen (OTCQX:VLKAF) saw an increase of 29.3% YoY in sales with strong Audi sales. Daimler (OTCPK:DDAIF) reported a 15.6% YoY increase in sales helped by sales of its Mercedes, Smart and Sprinter vehicles.
Chrysler reported a YoY gain of 14.4% in the units sold. WardsAuto pointed out that Chrysler's Dart sales were lower for November as compared to its sales in the last few months. The inventory of Dart at Chrysler's plant has swelled to over 23,000 units.
General Motors reported disappointing stats for November. The car manufacturer posted the smallest YoY gain in the sales among the major OEMs. The company also posted the largest MoM decline in the market share. However, GM still remains the market leader in the US with the largest market share of 16.4%. Some analysts believe that the low exposure of GM to the Hurricane Sandy zone hurt the company's ability to capture post-storm sales in the region. Following table shows the performance of different brands:
GM's stock is trading at a cheap forward multiple of 6x. The company, under the leadership of its iron-fisted CEO Dan Akerson, has been actively planning to strengthen its worldwide operations. In August 2012, the CEO announced a solid restructuring plan which clearly displayed his intentions of bringing the glory days back for GM. The company is well on its way to conduct the biggest product launch since its inception. Currently, the main concern for the company's shareholders is the State's stake of 32% in the company. According to an article published in the Wall Street Journal, the treasury will only sell its stake once the stock price moves to $53 at which the treasury will reach breakeven on the bail-out money injected into GM.
Ford sales rose by 6 percent on a YoY basis. The major chunk of demand was pulled by the fuel-efficient models and pick-ups. The brand sales increased by 7 percent and the sales for Lincoln were up by 9 percent. Following table shows the performance of different categories in Ford's products:
The company has the second largest market share in the US after GM. The company's management plans to ramp-up its production in the US by 11 percent.
The stock is trading at a cheap forward multiple of 7x. The stock also pays a dividend yield of 1.74%. The company recently reported its 14th consecutive profitable quarter. Ford, like many other automakers, is facing a tough time in Europe. The losses from European operations have been the biggest drag on the company's resources. However, the investors are excited about the company's European turnaround plan. Given that the plan works according to the expectations, the stock is expected to go high.
Taking into account the looming fiscal cliff, a weak auto market in Europe, and a slower-than-expected growth in China, there is a solid chance that the world is underestimating how fast the US auto industry will return to the days when 16 million plus SAAR was a norm.
We have got many reasons to believe that the US SAAR can rebound faster than expected:
- The interest rates are at long-time lows
- The housing recovery
- The automakers are on the back-end of the curve in ramping up the production capacity. Therefore, the concerns that suppliers will not be able to meet the rising demand have subsided considerably.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.