U.S. Auto Sales Solid, But Market Still Frets Recession

Includes: F, FCAU, GM, HMC, NSANY, TM
by: AssetInflation

Earlier we previewed August U.S. auto sales (link here), and like we thought, sales came in marginally higher with a seasonally adjusted annual rate of 12.1 million vehicles. While the rate is essentially unchanged from July, it was up solidly over 2010. Incentives also stayed in line with estimates and have remained under control through the typical summer 'old-model' closeout season.

The U.S. producers continued to shine, with particular strength at number three Chrysler. General Motors (NYSE:GM) again led the pack with overall sales of 218,479 units, an increase of 18% over Aug 2010. Ford (NYSE:F) came in next with sales of 175,220 units, an increase of 11% over Aug 2010. Finally Chrysler, which is now a division of Fiat (FIATY.PK), saw sales up 31% for total sales of 130,119 units.

Like we predicted, the Japanese producers Toyota (NYSE:TM) and Honda (NYSE:HMC) saw sales fall 12.7% and 24% respectively, while Nissan (OTCPK:NSANY) continued to grow by posting a 19% increase. Toyota and Honda have been the hardest hit from the earthquake supply shortages, but both pledged to return to normal this month as those issues have been worked through.

We view a 12.1 million run rate as a slight positive as it exceeds recently lowered expectations. While the market has been skeptical of recovery for most of 2011, the recent industry price retreat suggests fears of a double-dip recession.

Truck Rebound Still Waits For Housing

While GM may have increased its total share in August, it's decided to trim production of pickup trucks going forward. Last week, GM announced it over-estimated demand for trucks, as continuing weakness in housing and construction has crimped the need for new trucks.

For months the market has been concerned about GM's dealer inventory build, but the overriding fear has been whether GM will resort to costly new incentives to clear the imbalance. While GM has pledged to restrain incentive spending, the markets have remained skeptical.

We view GM's decision to cut production as a mixed positive, with both Ford and Fiat's Chrysler unit benefiting from maintaining lucrative truck margins while GM suffers a bit of credibility loss due to its slow reactive response.

Our Take

We continue to believe that the market sentiment is far too negative, and the severe pessimism over macro-recessionary possibilities is causing panic. The solid results should be comforting to investors, as total growth over last year is solid. When implosion talk dies down, the general trend should be a reversion to at least mid-July valuation levels.

In addition, analysts should be pleased that incentive spending has continued to be contained and market share skirmishes have not reignited an all-out price war. Interestingly, GM's management continues to stick with their prediction of 13 million cars for 2011.

"Our view is consumers are being cautious, and appropriately so. But they are not retrenching," said Don Johnson, vice president of U.S. Sales for General Motors. When pressed for reasons given the recent turmoil in consumer sentiment, he declared that, "consumers' balance sheet continues to strengthen and there is a strong pent-up demand."

With Toyota and Honda regaining full production capacity and restocking their dealer inventories, the last third of the year should be much stronger. We still contend pricing is the most important factor going forward. If pricing remains firm through the soft patch and profit margins hold up, a new dynamic may merit better long-term franchise valuations.

While the market is still focused on the double-dip recession, the gloomy outlook leaves the stock valuations in the doldrums. However, if one looks at the actual activity on the ground or listens to the foresight from the leaders, an entirely different picture emerges. We envision sales between 12.5 and 13 million vehicles for 2011, and at that level the car companies are quite profitable. Occasionally the market mis-prices the future, and we believe this is one of those times. We believe the industry has cut overhead to the point where they don't need to resort to margin-killing incentives. With the full re-entry of the Japanese makers this month, this theme will again be tested. If pricing holds, a new dynamic in the car industry will be added to the equation, discipline. First discipline, then confidence, then maybe even one day comes respect. For more thoughts on our favorites, read "Even in a Recession, Ford and GM Are Easy Doubles."

Disclosure: I am long GM.