Auto Sales Continue Despite Bankruptcies

May flowers looked more like dandelions than actual flowers, but hey, at least it’s not the dirt and dying grass we have been seeing over the past few months. Alright, that may be a bad metaphor, but you get the point.

Auto sales are still dismal, but are much better than the past few months and continue to surpass what the Street is expecting. So Chrysler is in Chapter 11 protection and the “New Chrysler” is about to emerge from bankruptcy (more about this later) and General Motors (GM) is now under the court’s protection.

General Motors’ filing represents the largest industrial filing, and the fourth largest of all time (Lehman Brothers (LEHMQ.PK) is still the largest bankruptcy filing), and hopes are that GM will be able to emerge in 60-90 days.

The real story though is that May auto sales were expected to see another dramatic drop but didn’t fall that far. Additionally, all the concerns about auto sales for Chrysler and GM falling off a cliff with the bankruptcy cloud circling overhead never really materialized. General Motors sales were only down 29.0% compared to May of 2008, which marks the fourth straight month of sequentially improving sales.

I always find it amusing when analysts and talking heads come on TV and say that General Motors doesn’t offer the right vehicles because the Company isn’t selling cars anymore. GM still sold more than 18% more vehicles than the company with the second most sales during the month (just happens to be Ford (F) this month). GM still sells more cars than Chrysler, Daimler (DCX), Volkswagen, and Nissan (NSANY.PK) combined in a given month.

Not to take anything away from Ford, the Company has been doing a great job (relatively) in navigating the current crisis and is taking market share. This marks the second straight month (but only the second in the last fourteen) when Ford outsold Toyota (TM) during the month.

The table below will outline the total monthly sales, how it compares to May of 2008 as well as the percent change for year to date figures. The seasonally adjusted annual sales rate, or SAAR, rose to 9.91 million vehicles, according to Autodata, up from a pace of 9.32 million in April. Sales slipped below 10 million units per year for the first time in 26 years in January. The production levels in the auto industry are slowly declining to match demand.

We estimate that currently the industry would be profitable with an industry SAAR of approximately 14 million vehicles, and if all the plant shutdowns and idlings are taken into account (assuming it starts tomorrow), it would take sales of approximately 11.5 million to 12 million to make the entire industry profitable.

Company	Vehicles	Change Y/Y	Change Year To Date
General Motors	190,881	-29.0%	-41.4%
Ford Motor Company	161,197	-24.1%	-37.9%
Toyota Motor Company	152,583	-40.7%	-38.5%
Chrysler	79,010	-46.9%	-46.3%
Daimler	16,303	-33.4%	-27.0%
Volkswagen	19,568	-12.4%	-19.5%
Nissan Motor Company	67,489	-33.1%	-35.2%
Honda Motor Company	98,344	-41.5%	-34.4%

The auto industry (and economy) has swallowed two auto makers going into bankruptcy, and with sales still on a decline of 34% year over year during the month, it matches the 34% drop in April. Similar to the housing market, the automakers are having what is tantamount to a fire sale on its inventory.

With almost 2,000 dealerships slated to close over the next six months (789 Chrysler and approximately 1,200 General Motors,) dealers are looking to liquidate the cars on the lot and not be left holding millions of unsold inventory.

May was an unbelievably busy month for the automakers (if you include June 1 as well). It saw two thirds of Detroit’s Big Three file for bankruptcy, one almost emerge from bankruptcy, brands were put up for sale, plants were closed, dealerships were closed, and a new era began for the entire industry.

Let’s start at the beginning: Chrysler filed for bankruptcy on May 1 and GM filed for bankruptcy on June 1. Chrysler is on the brink of re-emerging from bankruptcy with the good assets of the “Old Chrysler” being sold to Fiat to form the “New Chrysler” (GM is trying to follow this same line of action, using a 363 sale to sell its good assets to a holding company to form the new company, with the bad assets staying in bankruptcy indefinitely).

That is my biggest problem with all the news about how quick this bankruptcy was for Chrysler. Yes, some of the assets are about to emerge, but the assets that were deemed not acceptable will continue to sit in bankruptcy, and in our opinion Chrysler will not fully emerge until all its parts are fixed, not just the part above the water (think an iceberg).

Second: Part of the GM bankruptcy filing was the announcement that the Company will shed many of its brands and concentrate on its “core 4” brands (refer to wstreet.com for our past articles on the subject) consisting of Chevrolet, Cadillac, GMC, and Buick. Pontiac will be discontinued, Saab will hopefully be sold, Hummer was sold to a Chinese private equity firm, Sichuan Tengzhong Heavy Industrial Machinery Company, and news on the sale of Saturn should be forthcoming in the next few weeks.

Also part of the restructuring is more plant and dealership closures for both GM and Chrysler. Chrysler announced it would close 789 dealerships, while GM said it would close as many as 1,200 dealerships and hopes to increase that number to 3,000 by 2011.

Finally: The new era in the auto industry began on May 18 with the ushering in of the new CAFÉ standards by President Obama. It was a whose who on the stage with President Obama as auto executives, union executives, governors, cabinet members and even some people I had no idea who they were all crowded on a stage to hear the ground breaking announcement. In President Obama’s plans the total average mpg for every vehicle being driven in the United States will be 35.5 mph (includes a 42 mpg for cars and approximately 30 mpg for light trucks), and has to be accomplished by 2016 (4 years earlier and 5 mpg better than Bush’s previous Energy Plan).

This is a daunting task for the industry and one that will require a great deal of investment both from the tax payers and the auto manufactures as new models and new technology will need to be developed and plants will need to be retooled. The auto companies took the deal because an individual state led emission law would cripple the industry (not just the American auto manufacturers) more than it already is.

Ford continues to impress me with how well it is doing, and its new additions to its fleet with the new Taurus and the Fusion Hybrid have catapulted GM with respect to higher fuel efficiency vehicles, but we continue to say that the industry is not out of the woods yet.

Auto sales continue to be dismal and the economy still has a lot of job losses it needs to swallow. Earlier in the article, we said that we believed that more production still had to go offline to meet the current demand levels. The industry SAAR is improving, but not at a fast enough pace to save Ford, Toyota, Honda, Nissan, or Daimler even more pain. The mantra “less bad” continues to live in the auto industry.

Through the remainder of the year, expect to see continued sequential improvements with the strongest months coming in October and November as the economy begins to show its first signs of growth (and not just the “green shoots”).

That being said, we like the foreign auto manufactures as an investment, Toyota and Daimler being our two favorites, while for the ultra long term hold investors (you know the stock you buy for your kids college fund), we recommend buying shares of Ford.

By the end of the year, we feel it will be at least an $8 stock, but there could be some near term weakness.

Written by David Silver, a Research Analyst for Wall Street Strategies (www.wstreet.com) covering companies in the Transports, Autos, and Beverage sectors.

Disclosures: None

Comments

[405388:]

One suggestion for President Obama:
Please, don't preach the use of fuel efficient cars. In your country no one carmaker produce them now. It becomes a precious advertising for foreing carmakers and they thank you.
Please, do that when USA carmakers will be able to do the same (if so).
After all, the GOV is the bigger shareholder in that companies. Right?
Thank you

Jun 03 11:10 AM

[6343escortsr:]

Help save the USA and buy AMERICAN!

Jun 03 11:21 AM