Was July the Bottom for Auto Sales?

July was a horrible month for the automakers, but many believe it was the trough and that the situation will not get any worse. I believe if we see another spike in gasoline prices, July will not be the worst month. However, if prices continue to decline or even stabilize around current levels, July will likely become the bottom for auto sales.

However, with Americans cutting back on their driving and an expected economic slowdown worldwide, we expect July to represent the worst month. The industry reported sales for the month of August during trading on September 3, and while the numbers were improved from July, the results were still down dramatically compared to last year.

One of the main culprits for the weakness in the industry is the fact that gasoline prices are still extremely high, with the average price for a gallon of gasoline above $3.60 in most parts of the country.

Over the unofficial end to summer, Labor Day weekend, more Americans chose not to drive for their vacation. That marks the first time since 2006 during the Labor Day weekend, and the third straight holiday, that miles driven and people on the road will decline. Gasoline averaged $3.68 on Wednesday, up approximately 34% from a year earlier, according to AAA. The drop from the July 15 record of $4.11 wasn't enough to spur Labor Day travel or vehicle sales.

Of the three large automakers in North America (General Motors (GM), Ford (F), and Toyota (TM)), Toyota continues to experience the smallest decline.

TM was once thought to be immune to the volatility of the markets, but it has seen its sales decline over the first half the year, albeit slower than it Detroit counterparts.

During the month of August, the Company saw its sales drop 9.4% year over year and is currently down 8.3% for the year.

On the flip side, General Motors and Ford saw monthly sales declines of 20.3% and 26.5%, respectively.

For the year, the two are down 18.1% and 15.7%, respectively.

One of the biggest red flags that we saw in Ford's August report is that its Edge crossover, which was designed to lessen dependence on SUVs, declined 2%.

General Motors saw an uptick in sales towards the end of the month due primarily to the rerelease of its employee pricing plan.

For the month, its sales declined 20.3%, but those incentives did drive the needed traffic to the lots.

As a result, the Company has extended its incentive program to include most 2008 models and even some 2009 models. Despite the drop compared to last year, GM sold 31% more vehicles when compared to July.

Trucks

The only auto maker to see higher sales during the month of August was the other Japanese auto maker, Nissan (NSANY). This was due primarily to the strength in its SUV and light truck lineup. Frontier sales rose 55.5% to 9,140, while Xterra sales surged 76.9% to 8,208. Sales of its new Rogue crossover totaled 6,639. Ford's F-150, which had been the nation's best selling vehicle for the past 20+ years lost its top of the mountain status earlier this year and continues to see increased competition from the likes of Honda's Accord and Toyota's Camry. F-Series trucks declined 42%, while total truck and van sales fell 39% year over year. This compares to 24.1% and 16.4% drop in General Motors and Toyota truck sales, respectively.

We are of the belief that auto sales will continue to suffer through the remainder of the year, but more so that the industry needs to readjust its expectations. General Motors and Ford have been slowly adjusting expectations for the full year 2008 and into 2009, however, unlike many industry pundits, we do not think that the 16 million industry SAAR (seasonally adjusted annual selling rate), which had been considered healthy, will materialize in the near future. The industry needs to readjust the sales models to approximately 14 million vehicles, with 15 million being considered a good year. Ford indicated yesterday morning that it sees industry SAAR at 14.1 million, compared to the 12.5 million SAAR in July (the worst in 16 years).

Similar to the problems affecting the housing market, auto makers are seeing the people using "cheap money" fall out of the market. In the housing market, as it becomes more difficult to get loans, fewer people are upgrading their homes. The auto market is going through a similar phenomenon right now as resale values are falling drastically and the once dependable leasing market is drying up. This is why I believe the industry needs to readjust its expectations to account for stricter standards, less cheap financing, and fewer people trading up every three years.

Every few weeks more news surfaces about the potential for one of the automakers to go bankrupt. We do not think this is likely, and that all three automakers will emerge from this current environment leaner and more capable of competing on the global scale. Our current ratings on Ford and Toyota are SELL, while GM is a HOLD.

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

[Mister Jimmy:]

This is the most intelligent Seeking Alpha piece I've read...ever.

2008 Sep 05 12:50 PM

[Jobu37:]

I agree with Mr. Jimmy. However, on what basis does one view GM as a hold when compared to Ford's sell. You have to understand that probably 80% of GM's sales in August were at breakeven at best. Out of the Big 3 only Ford is demonstrating discipline in trying to limit rebates to reasonable levels.

2008 Sep 05 04:05 PM

[West Coast ...:]

Re: "gasoline prices are still extremely high" - that's the most ludicrous statement I've ever read here! They have to be MUCH higher.

A classical example of U.S. tunnel-vision! In Europe they are paying up tp $9.00 per gallon equivalent (at 1.50 Euro/liter that doesn't seem obvious - but a liter is only a 1/3.8th of a gallon). But the worst is that the still TOO LOW gas and diesel prices over here keep the three Detroit dinosaurs in their SUV-Return dreams, at the same time they have the most fuel-efficient cars over there. THAT is the real shame:

[The 65 mpg Ford the U.S. Can't Have]: www.businessweek.com/m...

2008 Sep 06 04:05 PM