In August, U.S auto sales of 1.29 million rose by 20% YoY, as the industry car sales figure reached a level last achieved in August 2007. Along with Japanese car manufacturers, the Detroit Big Three also topped estimates for sales, and recorded double-digit growth YoY. What is interesting to note is that it was not fleet replacement or industrial sales, but rather a jump of 5.2% in retail sales that led to the extraordinary August sales. In this regard, Ford also recorded a 13% YoY rise in sales.
Upon the revival of the auto industry in the U.S., Ford (F) is expected to be one of the main beneficiaries, as its increasingly vast variety of small fuel-efficient vehicles will help the company grab a majority of the revived sales.
U.S. Sales
August SAAR tracked at 14.5 million, well above Bloomberg's estimate of 14.2 million. However, there are different views regarding the guidance for SAAR by different automakers. General Motors (GM) says that the SAAR will be 14.6 million, whereas Ford expects it to be anywhere between 14.5-15 million. Estimates are that the U.S. SAAR will be 15 million in 2013 and 16 million units in 2014.
Before we discuss the performance of various automakers in August, it is important to discuss what led to the rise in car sales.
Retail sales were up by 5.2%, despite a cut of 5% in incentives. This gives a hint that the jump in sales might be because of pent-up demand, which is itself a function of the age of vehicles on the road. Also, the Case Shiller Index was up by 0.5% YoY and 1% in major cities. This is the first increase since October 2010. This shows a slight housing recovery, which actually led to a rise in truck sales. Also, during the first seven months of the year, housing starts were up 26% and new home sales increased 22% YoY. Consumer sentiment for the month was also up by 2 points to 74.3. Similarly, the PMI index has been stable over the last 6 months or so, giving a positive signal to the U.S. market. A major factor has been the opening up of credit for borrowers, which was not as easily available some time ago.
Ford gets 61% of its revenues from North America. August sales were up 8.4% (seasonally adjusted) YoY, which was more than the consensus of 5.1%. All three types - Utilities, Cars and Trucks, showed positive growth.
The table shows that Utilities was by far the most successful of the lot, as Ford's smaller fuel-efficient Utilities became a hit in the market. Escape, one of the small Utilities, was by itself responsible for 47% of the growth in Utilities sales.
The sales growth for Trucks was largely affected by the discontinuation of the Ford Ranger pickup, as only 192 units were sold as compared to 6,192 units sold a year ago.
Overall, the trend showed that people prefer to buy smaller fuel-efficient cars in recessionary times. Among the smaller cars, small SUVs have gained a lot of attention. 23% of total industry demand came from small SUVs, according to Ford.
Following shows the product-by-product sales changes for Ford:
Fiesta sales went down drastically. The management gave a hint in the earnings call that it was trying to concentrate more on the Focus to drive sales for this segment. They plan to streamline the Michigan Assembly plant to gear up the production of the Focus.
As far as the market share is concerned, Ford's share improved by 27bps MoM to 15.3%. The share increase came with help from sales of the Escape and F-Series.
Production
Ford said that it will not be able to reach the production level of 690,000 units in the third quarter, which it had given in its production guidance some time earlier. The guidance for the fourth quarter was 725,000 units, which is 7% higher YoY, but 3% below the forecast figure of 747,000. Following is the guidance:
The implication for investors is that production levels are rising as inventory levels fall. Inventory for the month of August was 414,000 vehicles, which translated into 57 days' supply. This was less than the 62 days' supply for August last year.
Conclusion
Ford pays a solid dividend yield of 2.23% and cash flows are positive. Earnings are expected to rise at an annual rate of 11% for the next five years. It is trading on cheap multiples, as the global Auto Industry has been hit by a severe crisis. The news of a record rise in the U.S. SAAR has given some fresh air for auto players to breathe in. This rise may indicate that the U.S. recession is finally coming to an end. However, investors will wait for other indicators to go in a positive direction as well, before believing that the economy is heading towards solid growth. That will be the moment when cyclical stocks like Ford start their journey towards new highs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
