March Auto Sales: Don't Get Too Optimistic

March represented one of the best months for the stock market in a long time. During the month, the Dow Jones Industrial Average, S&P 500, and NASDAQ were up 7.8%, 9.4%, and 12.7%, respectively. To contrast this, the three largest automakers (General Motors (GM), Toyota (TM), and Ford (F)) saw sales during the month decline 44.3%, 36.6%, and 38.3%, respectively. Those types of figures would normally have taken the wind out of any rally attempt, but following the release of the numbers the market surged into the close as most figures surpassed what the Street was expecting.

Similar to other recently released economic data, the market is spinning the results into a positive, "it was down, sure, but not as bad as we thought it would be." The problem with that line of thinking is the bar is set so low, it doesn't take much to surpass it. The following table outlines the sales figures, percent change from March 2008, and the change so far in 2009 compared to the first three-months of 2008.

The seasonally adjusted annualized selling pace (or industry SAAR) for cars and light trucks was forecasted to fall below 9.0 million units (we had expected a relatively flat month with a 9.06 million unit SAAR) compared to a 9.1 million and 9.6 million unit SAAR in February and January, respectively. The figures still represent a much stronger month compared to February as General Motors, Toyota, Ford, Chrysler, Nissan (NSANY), and Honda (HMC) all posted month to month improvements of better than 20%.

In our previous auto sales report, we said that we weren't ready to call February the bottom for auto sales (and despite the improvement this month), and we are still going to hold off from jumping on the only positive bandwagon. The industry still has many problems to overcome, but with warmer weather and record incentives more consumers will enter the showroom. As we have been saying for the past few months, there is plenty of pent up demand and we suspect that most of the increase seen during the month came as a result of consumers taking advantage of massive incentives. Hyundai and General Motors have NEVER offered as many incentives as right now. To jumpstart sales, U.S. automakers offered, on average, a record $3,169 in incentives on each vehicle sold in March, said car-shopping website Edmunds.com. The figure represents a jump of $733, or 30.1%, from a year earlier and $171, or 5.7%, from February.

Earlier this week, President Obama and the auto task force ousted former General Motors CEO Rick Wagoner, announced it would be backing all of GM's and Chrysler's warranties, and gave Chrysler one hell of an ultimatum; merge with Italian auto manufacturer Fiat SpA or file for bankruptcy. On March 31, I published my thoughts to these actions.

The market continues to only see the positives in all the economic data, and despite the improvements from the month before, we implore investors not to get too optimistic. How quickly the market forgets that the largest automaker in the country is on the brink of bankruptcy. We hope that over the next two-months the government puts into place some speed bumps that will prevent the tidal wave of job losses that the market (and GM for that matter) foresaw back in December when talks were circulating. Consumer confidence is not getting worse, but job losses continue to mount. The real litmus test will come this Friday, with March's jobs report from the Bureau of Labor Statistics.

With all the incentives that were initiated during the month, we were not surprised to see the big jump from February. Additionally, Ford and General Motors announced that it will now be offering income protection payments (similar to Hyundai) where the company would cover car payments in the event a consumer loses his/her source of income. Many companies in the industry continue to offer 0% APR, and now General Motors is rolling out a program with GPS and On-Star standard on all vehicles. As we said earlier, we feel a good portion of the improvements during the month stemmed from the pent up demand, however, if the good numbers continue to roll in, we will see a self-fulfilling prophecy instead of the negative cycle we have been stuck in where bad news begets more bad news.

We still remain bearish on companies in the sector, as we are not convinced that this is just a bump. The economy still has to digest the massive job losses it has encountered over the past 18-months, and we feel that auto sales will not begin to recover until at least the end of the third quarter. Production remains at anemic levels and a wave of auto parts suppliers going bankrupt could cause havoc on the industry. The optimist in me wants this to be the beginning of the turnaround, but the realist in me sees this as merely an extended bear market rally and speed bump on the way down.

Comments

[PeteK:]

Buying a new car is the least concern in many people's minds right now.
Some like Big Cars but worry about gasoline may jump back to $4.00 per gallon.
So, keep the old faithful for the time being.

Apr 03 03:49 AM

[Trosian:]

The car companies are driving themselves to financial ruin with a greater focus on leases and "cash for clunkers" programs. The real key, is driving down costs. tower12.blogspot.com/ Provides a great overview of the woes in the industry.

Apr 03 11:59 AM

[Lightway:]

I also feel GM really could turn itself around after getting rid of all their legacy cost issues. I am skeptical this behemoth can do it, but with outside leadership DEMANDING they change, it may be possible. Believe it or not, there are a couple of cars GM makes which actually do have quality and are competitive.

After the cost issues are dealth with, there are 2 Key factors to success of a GM turnaround:

1) Eliminate stupid product lines, and products competing among one another.

Simplify the product lines and make your core products REALLY GOOD. Toyota did this with Corolla and Camry, Honda with Civic and Accord, and Ford should be doing this with F-150 and Mustang. GM needs to pick a truck, economy sedan, and a mid-range sedan and make them really good.

2) Focus on CUSTOMER CARE.

There is one area where it could be transformative and differentiate itself from its competitors: customer care. They made the right push with OnStar, but they need to make this a company wide push in every aspect of car ownership. Buyers HATE dealing with buying a car, they feel like they are getting ripped off going into the dealer, who encouraging shady selling practices. Buyers also generally HATE dealing with car repairs, because they feel like they are going to get ripped off there too. Clean up this systematic abuse which has been going on for years and you can grab some low hanging fruit and win customers over.

I personally can't tell you how many thousands of dollars I have spent SOMEWHERE ELSE due to really bad customer service. Or, I decided to keep my money with a particular seller because of how good their customer service was.

Car dealers treat their customers like trash, and this is something that needs to change.

Apr 03 06:18 PM

[slowdown:]

God...I love these graphs because they show that the Detroit 3 OEMs sold more vehicles than all of the rest of the transplants combined.....and how 'bout those Spartans??? Pretty darn good for car makers that build cars nobody wants and a bball team that according to the pundits lack talent and athleticisim. I say to hell with the pundits on all fronts - GO DETROIT - GO GREEN GO WHITE- STATE ALL THE WAY!

Apr 04 10:27 PM