February Auto Sales Hit Another Pothole

On Monday, automakers reported auto sales for the month of February and the figures should not have come as a surprise to anyone. February of last year was the best month for auto sales in 2007, but this time around consumers around the nation are fretting over a possible U.S. recession and being shut out of auto loans given the state of the credit markets.

General Motors (GM) reported a sales decline of almost 13% for the month, Ford's (F) sales slumped 7%, Chrysler's tumbled 14%, and Toyota's (TM) fell 3%. Honda (HMC) was able to buck the trend, posting a 5% increase in U.S. sales as booming sales of its small cars and crossovers picked up the slack from its slumping Ridgeline pickup and luxury sedans.

North American automakers have become so dependent on sales of the gas guzzling light truck and SUVs that it will take some time to wean themselves off and shift operations towards more fuel efficient and hybrid models. General Motors and Ford saw truck and SUV sales decline 19.0% and 5.6%, respectively in February. Even Toyota, which sports the most extensive hybrid vehicle lineup in the industry, posted a slight decline in truck sales of 0.8% as the extensive marketing campaign for the Toyota Tundra continues to help sales. GM, Ford, and Toyota saw total light vehicle sales decline 12.9%, 6.9%, and 6.6%, respectively.

GM and Ford are actively attempting to restructure their operations and car lineups to meet the changing marketplace, with the former appearing to be performing better. One would have hoped that the U.S. automakers would have seen this trend coming but the industry has been slow to react. That said, the real growth story of the automobile sector is not in sales for the U.S. but rather for sales overseas, specifically China, Russia, India, and Brazil.

There used to be a common adage that “as the auto industry went, so went the U.S. economy,” however, despite the slowdown in both, that just doesn’t hold true anymore. Yes, the overall economy is slowing down, and yes auto sales are declining, but the U.S. economy’s dilemma is much more complicated. The CEO of Nissan (NSANY) (which owns a 44% stake in French automaker Renault), Carlos Ghosn, said:

We are very lucid on the situation of the industry that there is a recession in the United States, at least in the car market.

He went on to say that the American auto market “will not stay in recession for a long time.”

While we agree with Mr. Ghosn that the auto industry is suffering from slower sales, higher costs of labor, and higher raw material expenditures, we do not believe it is in a recession. We do agree with him that it will not be a prolonged slowdown and that the industry will accelerate in the second half of the year as the Fed’s monetary actions of the past six months begin to filter through and boost the economy.

For the first half of 2008, we are expecting the industry to be relatively range bound as a weakening economy and higher raw material costs offset any cost savings from restructuring or the new UAW contract. However, in the second half of the year, we are expecting our favorite in the industry, General Motors to outperform the others in the industry. Support for GM being our favorite, compared to others in the industry, includes:

General Motors has strong exposure (better than Ford and Toyota) in fast growing markets such as China, Russia, India, and Brazil.

Toyota will be the best performing auto maker in the struggling mature North American market, but the Camry’s lead continues to be eaten away by the new Malibu, Ford Fusion, and Honda Accord.

GM is ahead of Ford in the restructuring process and will see the benefits of an improving economy quicker than Ford.

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

Disclosure: none

Comments

[Ghost Writer]

From an inside view at ford, the 7% slump in sales is just the beginning. The tactics being made to reverse the negative issues are just avenues to open doors of new problems within the company. One idea was to use the 2006 ford 500 and put the well known taurus name plate on it for higher sales. Well that didn't work. Another was to advertise the safety of ford vehicles whether they are safe or not, and at the same time gas prices are on a constant incline. And my favorite is the restructure of employees at ford assembly plants. Some benefits were taken away, quality issues arised. hours were taken away, then production became an issue. UAW and the executives at ford had a great idea. Let's create our own in-house temporary agency and hire so many hundreds of people at half the salary, add to their jobs so that we can eliminate some jobs. No benefits, no seniority, no promise to any permanent positions. While at the same time over $250.000 weekly was being saved and the required production is still being met. If a temporary part timer get hurt on the job, a possible termination follows that injury. So you can imagine how many employees are performing their overloaded jobs with injuries and are afraid to say anything. Fords market cap launched from $18B to $13B in 6 months. $9 to $6 per share in the same amount of time. With the issues arriving from UAW and Ford, the question should be to the execs. how many more months do you plan to stay active in the auto industry? 24,36,or 48. Economic problems can't and won't be fixed over night. with bad product, less jobs, there's a shortage in sales. The realestate market is bad with national high forclosure rates, the credit bureau increased the numbers for low risk, one income in a household is unheard of these days, salary caps are being lowered, while gas, electricity, and taxes are being raised. Is there light at the end of the tunnel?

[David Silver]

GhostWriter, Yes I do think there is light at the end of the tunnel. The US auto industry is no doubt struggling and they do have years of negative feelings to overcome. For a while, American cars were not on the same level as some European and Asian automakers, but it appears that gap is shrinking. Now GM, Ford, and Chrysler need to build cars that people want to drive, plain and simple. The era of the cash cows of light trucks and SUVs appear to be coming to end with oil prices that are above $100 and gasoline prices that promise to rise even more.

There are all those headwinds in the industry such as higher food and gas and energy prices, and as long as the push continues to be into ethanol nothing will change. The surge in ethanol demand from corn has caused food prices around the world (and other commodities) to skyrocket. I do think that economy will begin to improve but that we are currently stuck in a self fulfilling prophecy. Everyone is scared we are already in a recession so people are spending and causing us to slip towards a recession.

The Company could do everything under the sun to improve its financial standing, but none of it will matter if sales continue in the negative way they have been trending. When sales begin to improve, we will see if the actions have had the desired effect or if the company will again slip back into its old ways.