Last Call For U.S. Auto Industry?

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 |  Includes: F, FCAU, FUJHY, GM, HMC, HYMLF, MZDAD, NSANY, TM, TSLA, TTM, VLKAY, VOLVY
by: David at Imperial Beach

Summary

July posted strong y-o-y growth of 9%, but fell short of expected gain of 11%.

Many customers buying on 72 and 84 month loans. Some even getting zero interest 72 month loans.

Nominal interest rates are scheduled to rise next year.

US auto sales numbers are in for July. At 9% year-over-year growth to 1.433M units, the industry appears to be one of the brighter spots in the current economy, but there are clouds on the horizon. Industry analysts were actually expecting 11% growth, according to Reuters.

GM's (NYSE:GM) sales were in line with the industry average at 9%, with 256K units. This should be considered good performance considering their recall headwind. Mary Barra continues to impress with her leadership. Going forward, GM will be stronger for having the culture reset that is currently underway. Chevy's Silverado sales made up 42K of the total, while GMC's Sierra added another 17K for a total of 59K GM truck sales. GM truck sales did not keep pace with the market. Silverado was flat and Sierra gained only 5%. Cadillac sales fell 2.6% to 15.2K units. Chevrolet and Buick also lost ground to the overall market, but did manage a year-over-year gain, up 7.7% and 7.9% on 175.1K and 17.6K units, respectively. The bright star was GMC division, rising 22.2% on 48K units, all body styles included.

Ford (NYSE:F) lost second place to Toyota (NYSE:TM). Toyota sold 215K units and was up 12% while Ford sold only 212K units for a gain of 10% on last year. Ford is apparently not in a position to capitalize on GM's weakness. They hope to do better next year when they have 16 new models, but it may be too late if rising interest rates get in the way. Meanwhile, Toyota surged ahead with a strong showing, with their Lexus luxury brand doing especially well. Lexus (27.3K) took first place in the luxury segment from Mercedes (27.1K) and BMW (26.4K). Ford's Lincoln brand is traditionally very weak compared to other luxury brands, but it did manage to take ground with a gain of 14% on 7.8K units. This gain was accomplished without the help of the MKZ, which was down by 1.2%. F-150 sales were 63K and generally sold for $1000 higher per vehicle than GM. The high price slowed sales, which were up only 5%.

Chrysler (OTCPK:FIATY) did especially well on a year-over-year basis, up 20% on 167K units. The Ram pickup sold well, but not as well as the autos. It gained 14% to 35K units. Jeep sales were especially impressive, up 41% on 59K units. The Fiat 500L was up an even more impressive 49%, but total Fiat sales were up only 1% to 3.8K units. Investors may want to take note that the newly re-incorporated Fiat Chrysler Automobiles NV is being incorporated in the Netherlands and is expected to list shares in the US in October. CEO Sergio Marchionne seems to be executing particularly well both at Fiat and at Chrysler.

Honda (NYSE:HMC) lost ground versus last year, but still managed to stay ahead of Nissan. They sold 135.9K units, of which 123.4K were Honda brand (down 2.3%) and 12.4K were Acura (down 17.6%).

Nissan (OTCPK:NSANY) had a strong month, up 11% on 121K units. Hyundai-Kia (OTC:HYMLF) did not keep up with the market, but did manage to register a 4% gain over last year on sales of 119K units.

Volkswagen AG (OTCQX:VLKAY) was a big loser for the month, down 6% to sales of only 49K, including Porsche and Audi. This must be especially frustrating for them since they do so well in the rest of the world. I would expect to see some management changes in their American unit, and a redoubling of efforts to penetrate the US market.

Subaru (OTCPK:FUJHY) did especially well, gaining 27% on 45K units. Mazda (OTCPK:MZDAD) also gained market share, up 17.1% on 29K units. Rumors of Mitsubishi's death in the US market were premature. They managed an impressive 21.4% gain on 6.3K units. Latest news from Mitsubishi is that they intend to introduce a new EV.

European brands Volvo (OTCPK:VOLVY) and Jaguar/Land Rover (NYSE:TTM) struggled in July in sympathy with VW. Volvo dropped 17.1% and sold only 5.9K units. Jaguar/Land Rover sold a total of 5.8K units. Jaguar dropped 26% on 1.1K units while Land Rover managed a strong 15% gain on 4.6K units. Jaguar/Land Rover, of course, is owned by Tata of India, but the Jaguar/Land Rover division is based in UK.

Tesla (NASDAQ:TSLA) does not report monthly sales figures, but they sold 7.5K Model S units in Q2 worldwide, about 40% go to the US. Doing the math, that's about 1K units to the US per month. They expect to grow capacity by 100% to 100K units by the end of next year, with a commensurate increase in sales.

Additional sales details on a brand-by-brand basis may be found here. Additional details on Tesla can be found in their Q2 letter to investors here.

Loans are now going out to 84 months, and some dealers are offering free financing of up to 72 months. (This Edmunds article shows that GM started doing this back in 2008). With the impending interest rate hike scheduled for next year, this could spell the end of such generous offers, and consequently end the party currently under way in the automotive world. Investors should take heed that Fed actions could have a negative impact on the US industry beginning next year. This will work out especially harshly for Ford, which is introducing 16 new models this fall. These late arrivals to the party could find all the beer has been drunk. This could explain why most of these companies still have attractive looking PEs relative to the rest of the market.

Commodity prices have generally not kept pace with other asset classes and are due for significant rises, especially the metals and oil. Palladium is already moving upward this year, and it is used in automotive catalytic converters. When inflation finally hits this asset class in earnest that will be the second of a one-two punch for the auto industry, since it will mean higher costs for the industry and also a greater motivation for consumers to gravitate to less lucrative but more economical models. Consumer inflation is at 2%, with wages lagging, as usual. This adds pressure for consumers to keep their old vehicles as long as possible.

For those value investors not put off by the above considerations, Fiat-Chrysler would be my pick of the best of the above stocks to hold for the long term, once the new stock becomes available in October. For growth oriented investors, Tesla is the obvious choice, despite the high PE.

Disclosure: The author is long TSLA. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author is not planning to initiate any other positions in the stocks mentioned, but may take profits in TSLA at any time.

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