AutoMakers: We're Not in Kansas Anymore

Follow the yellow brick road

Follow the yellow brick road

We're off to see the wizard

The wonderful Wizard of Oz

 

When Dorothy uttered those words, who figured that the scarecrow, lion, and tin man would eventually become Detroit's big 3 automakers?  For years, the industry was in a dream world that saw sales continue to increase with SUV and light trucks leading the way, despite higher gasoline prices and fuel efficiency concerns.  The journey through the haunted forest has left Wall Street and investors weary, as these companies try to reach the bright green castle of profitability.

 

General Motors (GM) announced that it was cutting production for its light trucks and SUVs, which is just another link in the chain of negative news releases out of the automakers.  Even the invincible Toyota (TM) is considering lowering its estimates for 2008, amid the drastic industry slowdown.  These announcements come on the heels of Fords announcement (F) that it is slashing production and is expecting a bigger net loss for 2008, and unlike previous guidance, is not expected to break even in 2009.  General Motors already announced that it would shutter six SUV and truck plants from one to ten weeks between now and the end of the year, as well as the previously announced five plants that it would close between now and 2010. 

 

Trucks and SUVs have seen the sharpest decline in sales year to date. Sales of the Chevrolet Silverado large pickup were down 26% through May, while sales of the Chevrolet Tahoe large SUV fell 30%.  It takes dealers more than 90 days to sell each of those vehicles in an industry where 60 days is the average turn rate, according to J.D. Power and Associates' Power Information Network.  General Motors and Toyota have been in battle for the title of the world's largest automaker, but the former has had a solid lead in its home U.S. market.  However, over the past few years, Toyota has made significant gains.  

Decades ago, General Motors had a market share of about 50%, but by 2000, it had been eroded to 30% (Toyota only accounted for 9.3% of industry auto sales).  However, in the month of May, General Motors' vehicle market share sank to 19.4% (the first time in more than 50 years that its market share was below 20%) while Toyota's market share increased to 18.6%. 

 

June is expected to bring more of the same results for GM, Ford, and Chrysler (DCX), while Toyota is looking to improve upon the 4.3% decline in May.  Toyota looks to perform better than Detroit's Big Three as a result of a more extensive offering of smaller, more fuel-efficient vehicles.  The Prius continues to fly off the lots, with sales of the Camry and Corolla finally surpassing sales of Ford's F-150. 

In an effort to work through this difficult time, General Motors has offered 0% financing or up to $7,000 cash back for some of its SUV, light truck, and larger sedan fleet.  Others in Detroit are expected to follow suit in due time, but the question is whether such a move gets the gas guzzlers off the dealer lots.  We are inclined to believe that it will not. What it will do is get more people onto the lot, but we do not foresee any significant increase in sales.  Instead of seeing the 40% sales decline run rate we have been seeing in recent months, maybe only a slight deceleration will result for June.  However, gasoline prices are at record levels, and crude oil prices don't seem too willing to give up any ground. 

 

We would avoid shares of the automakers.  Instead, we would follow the consumer to the auto parts stores, where they are looking for little ways to improve fuel efficiency.  The companies that will benefit from such a consumer shift most are AutoZone (AZO) and Manny, Mo, and Jack's Pep Boys (PBY).  With so many obstacles facing the industry currently, the executives are furiously clicking their heels and hoping that the hot air balloon will whisk away their troubles.  There is no place like Detroit....there is no place like Detroit.

Disclosure: None

Comments

[fatcat]

Autozone has been a winner for awhile.It was kinda flat for few years,but buying it on dips over the last decade would have made you very rich.Reminds me of Circuit City(25 yrs ago)...Now look!