Wall Street Strategies'  Instablog

During August we had the cash for clunkers program, and many expected (yours truly included) to see a difficult month for the auto industry during September.  What I didn't expect was all the company driven incentive programs (not dealership) that were instituted during the month.  General Motors has its new 60 day money back guarantee and Hyundai has its own little cash for clunkers program running.  Ford (F) posted a stronger than expected result while General Motors and Chrysler were again weak, with sales dropping 45% and 42% respectively.  Its interesting to note that GM and Chrysler would have done better if the companies had more vehicles on its lots as inventory shortages hampered sales; a grave difference from a few months ago when both companies had months of inventory on dealers' lots nationwide.

The industry seasonally adjusted annual rate of sales (SAAR) was 9.2 million vehicles, which is roughly equal to that of June when two automakers were in bankruptcy (General Motors and Chrysler).  There have been some rumblings following this figure that maybe the cash for clunkers program didn't steal sales away from the future months, as many had expected.  We think there was a strong pull forward effect from the cash for clunkers program and even from all the incentives that the automakers offered during the month.  For the first time in three months, incentives offered increased.  Edmunds.com, an automotive Web site, estimated that the average U.S. incentive was $2,557 per vehicle sold, up 3% from August 2009 but down 12% from September 2008.

September was supposed to be the worst of the hangover months for the auto industry, but we expect that September and October will be the two biggest months for the auto industry in terms of importance.  Third quarter results will be inflated by the government program, so the true success will come from the first two months after the program.  Ford indicated that inventory levels are currently at only a 10 day supply, which would justify the massive increase in production, however, once that inventory is replenished, are auto sales expected to remain at the anemic 9.2 million level or improve? 

Cash-For-Clunkers Hangover
Fuel efficient vehicles are still garnering most of the sales in the industry, but interestingly, partially as a result of lower fuel prices, sales of SUV's and trucks have inched higher.  One of the biggest surprises came from Ford with its mere 5.1% decline compared to September of 2008.  While the number looks like a great improvement, it is also important to remember that September of 2008 was an absolutely dismal month for Ford, so it was an easy comparison.  Regardless, Ford is among our favorites in the industry as it has a growing lineup of fuel efficient vehicles and is no longer so far behind the curve with its new products.  The new Taurus and Fusion continue to take market share; for the twelfth time in thirteen months, Ford has taken market share not only from its American competitors, but also from Asian and European manufacturers as well. 

So what do the next few months hold for the auto industry? With all the sales that were brought forward, the high unemployment rate, and the new changes to consumers' debt levels (think higher credit card fees and lower lines of credit), auto sales could potentially fall off another cliff.  September was better than we had modeled for, mainly as a result of higher than expected demand for trucks and crossovers.  In my previous update following the August sales results, I said that "excluding any additional incentive spending, auto sales will be lucky to reach the 10.0 million unit range."  Sales were weaker than the 9.69 million units from June and while it is better than some were expecting, it is far from a healthy industry, and yet company after company is announcing production increases. 

So to recap, the automotive industry isn't as bad as it was when General Motors and Chrysler went bankrupt, but it is far from a healthy industry.  Cash for clunkers gave the industry a good shot in the arm, but the lasting effects have been muted at best. Our hope is that the automakers don't drink their own kool-aid and start believing that there will be a quick turnaround.  (On a side note, it is very strange to hear very tepid and conservative guidance given, when only a few weeks earlier, companies were increasing production).
 

Written by David Silver, a Research Analyst for Wall Street Strategies (wstreet.com) covering companies in the Transports, Autos, and Beverage sectors.  For more information about Mr. Silver, refer to the company’s website, wstreet.com.