June U.S. Light Vehicle Sales Preview

 |  Includes: DDAIF, F, GM
by: Jerry Marks

New U.S. vehicle sales are expected to come in flat to as high as 16.8 million vehicles on a seasonally adjusted annual rate basis for June, according to analysts.

Source: Poornima Gupta. Reuters. July 2, 2007

While the number of vehicles sold may be up from the year-earlier period, industry watchers say, it's likely to be the result of profit-eroding sales incentives. Softness is also possible with General Motors and Ford Motor as they pull back on low-margin fleet sales.

Source: The Wall Street Journal. July 3, 2007

U.S. Light Vehicle Sales Preview (June)
Automakers will release U.S. light vehicle sales for the month of June throughout the afternoon.

Below are the second quarter (Q2) figures for last year (2006), what has been reported through May (2007), and my guesstimate (forecast) for June (2007).

vehicle preview 1

Now you should keep in mind that my forecast for 1.5 million vehicles in June (2007) equates to 16.1 million units on a seasonally adjusted annual rate (or SAAR) basis.

So the 16.8 million units you saw suggested in today's opening quote suggests something more like a +5% improvement from June 2006, or nearly 1.6 million vehicles (well 1.57 million).

You should also keep in mind that in May 2005, GM began its novel "you pay what we pay" (employee discount) marketing incentive campaign. And by June Chrysler and Ford had followed suit, causing a big surge in June U.S. light vehicle sales (in 2005).

This made for a "tough comparison" when we got into June 2006 (hence why you saw the 10% drop).

So we were supposed to see the first set of "normal" comparisons (without aggressive incentives) this summer.

But as you also saw in today's opening quote, the word on the street is that incentives escalated at the end of June. I don't know how to measure incentives or net price. But typically if sales popped at the end of the month (and an important quarter end period at that) there is probably some validity to the claim.

Nonetheless, GM's (NYSE:GM) Paul Ballew (Executive Director Global Market and Industry Analysis) and Mark LaNeve (GM North America Vice President) hosted a conference call just June 21, 2007 with the media, where they emphasized the company's "go to market strategy." Meaning a clear, consistent (and not heavy) discount strategy.

In fact, Mr. LaNeve's "key imperatives" listed on the conference call slides were as follows:

  • Retail Sales Stabilization (3.0 million units)
  • Reduce Incentive Spending
  • Improve/Increase Residual Values
  • Reduce Daily Rental Volumes
  • Improve Advertising Effectiveness/Advertising Alignment
  • Source: GM U.S. Sales and Marketing Media Briefing Slides. June 21, 2007

    And I have yet to see a "novel" incentive program that will stimulate industry volumes like we observed in 2005, 2003, and 2001 (notice every other year).

    Only time will tell if the automaker's are able to hold to their intentions of easing consumers off the incentive "drug."

    Dealer Inventories
    But I am happy to report that dealer inventories continue to move in the right direction as the historical data (through May 2007) and my forecast (June 2007) suggests below.

    vehicle preview 2

    I also included dealer inventories from the year 2000. I don't like days supply (the theoretical number of days a dealer would take to sell through their inventory stock).

    But if you want to look at things on kind of a "dealer stock to sales" basis. If my forecast for about 16.2 million light vehicle sales in 2007 holds, it means the second quarter of 2007 dealer inventories can cover about a fifth (21%) of the year. Whereas last year in the second quarter dealer inventories could cover almost a quarter of the year (of course hindsight is 20/20).

    My point, however, is that while slightly better than April 2000, this is one area where you will hear me agreeing with AutoNation's CEO.

    With all of the technology that has taken place over the last 20 - 30 years in the area of retail and supply chain management, you would think there would be better ways to stock the vehicles. It is fascinating to me that the inventory/merchandising levels are generally similar (relative to sales expectations) as they were six years ago (and from what I am told even 30 years ago).

    A Good 2Q For Public Dealers
    Importantly for investors, a surprisingly strong (vehicle sales) finish after a pretty weak start in April (when the large public dealer groups were hosting the conference calls and providing guidance) likely left the large public dealer groups with a better second quarter (2007) than what most people were expecting.

    But you and I are not interested in getting caught up in the hype. We're simply trying to follow the bouncing ball. Especially in trying to understand when the "tug of war" I have been talking about for the last 5+ years comes to an end. It is the end of "demand creation" (I have so theorized) that will prove the impetus for real rationalization (consolidation) to occur in the number of franchises out there in the marketplace.

    So as I have said on many occasions before. From everything I have observed with the industry, it suggests this is going to be a good summer for dealers.

    If it is (as the June data and public dealer group second quarter results may very well confirm), it merely follows the "cycle" if you will: 2001, 2003, 2005, and 2007 of every other year the dealers pushing back, and then the automakers creating demand to move the metal off the lots.

    But if we don't see a turn. Now, that (in my opinion) will prove even more interesting for the real long term investment merits of the companies.

    June 2006 Light Vehicle Sales Environment
    Here is what I said last year about June 2006 light vehicle sales. Keep in mind every August the Bureau of Economic Analysis changes the "SAAR" factors and this is why you see me mention 16.3 million, but today people refer to the June 2006 SAAR as 16.1 million.

    According to Ward's Auto, U.S. light vehicles fell 10.6% from the prior year period to ~1.5 million units. On a seasonally adjusted annual rate (SAAR) basis, this equates to 16.3 million units. The industry figures came out a bit worse than the preliminary indications.

    While the results were generally weak, there were also some positive developments, at least from the perspective of an automakers like GM. Specifically, General Motors management indicated that while the sales figures were weak (due to tough comparisons), the figures actually exceeded the company's expectations and was the best market share of the year for the company.

    Ford (NYSE:F) and DaimlerChrysler (DCX), on the other hand, indicated the results were weaker than expected. Both GM and Ford conference calls suggested the management teams had no intentions to follow Chrysler down the "slippery slope" of becoming more aggressive with their pricing.

    However, dealer inventories remain our biggest worry. We estimate industry-wide dealer inventories were ~3.75 million units, essentially unchanged from June of 2005 despite dealers absorbing significantly higher floor plan interest expense. Specifically, GM and Chrysler had higher dealer inventories versus a year ago, while Ford's year-over-year inventory improvements ebbed.

    While dealers have made the case to us that it makes sense for the automakers to clear out inventories this summer (with a big blowout sale), we have simply seen time and again that the automakers don't react until they are backed up against the wall by dealers.

    We think this pushback (and inventory clearance sale) therefore is more likely to arrive in the winter/or even sometime into 2007 as dealers feel the pinch of higher inventory carrying costs. This may particularly hold true for a company like GM, which is looking at having a third fewer workers next year, allowing them to possibly absorb production cuts more easily than they could today.

    Source: Auto Retail Informer. July 5, 2006