- U.S. auto sales slowed down in February: light truck sales registered a growth of 7.8% while the car sales remained flat
- Strong truck sales bode well for the profitability of the Detroit Three since they dominate the pickup segment
- In the long term, the automotive industry’s growth rate will slow as the market size nears the pre-recession levels
A closer look at February’s monthly sales reveals that the American auto companies like General Motors (NYSE:GM) and Ford Motors (NYSE:F) stand to benefit if the current trend of strong truck sales were to continue. While the overall growth might have slowed down to 4%, light truck sales were up 7.8%. Car sales were flat, suggesting that they might be nearing their peak. Post-recession, light truck sales were battered due to a plunging housing market. Now, with construction activity recovering, their sales are witnessing a boost [U.S. auto sales, wsj.com].
Strong truck sales bode well for the profitability of the American auto companies since they dominate the pickup segment. Not only does that mean that the Detroit Three could steal a larger chunk of the incremental sales, but the more profitable light truck category could boost their margins as well. Going forward, you could very well see the overall automotive market driven by the light truck segment (i.e. SUVs and pickups). A 100 basis point expansion in GM’s gross margins translates to about 15% gain in the stock price, as per our estimates.
GM’s Silverado sales surged 29%, while Ford’s F-150 sales were up 15%. With GM introducing newer versions of Silverados in the summer, the company could command higher pricing for the vehicle, which will help profitability.
Growth Likely To Cool Off
February’s monthly sales translated to about 15.4 million units on an annual basis, which is still lower than the peak of 17 million back in 2005 [US auto sales power ahead in February, March 4, 2013, philstar.com]. The last couple of years have been strong for the automotive industry, although the growth has come on top of a low base. Now with the total market size reaching close to the pre-recession levels, the rate of expansion will likely slow in the coming years.
Historically, the total number of vehicles on the U.S. roads has shown a strong correlation with the total number of houses. It has typically stayed in a range of 2-2.1 vehicles per household. The historical average growth rate for the number of households has been more or less equal to adult population growth (~1.2% annually). Therefore, you can expect the total number of vehicles in the U.S. to rise by a similar rate in the long term.
We have a $28 price estimate for General Motors, which is slightly ahead of the current market price.
Disclosure: No positions