Mazda's New Growth Engine, Literally: Diesel

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About: Mazda Motor Corp. ADR (MZDAY), MZDAF
by: Anton Wahlman
Summary

Mazda sells 74% of its CX-5 diesels in Japan and 58% in Europe. In the U.S. thus far: Zero.

Assuming a 15% diesel take rate (similar to Jaguar Range Rover) and it being incremental, that would yield approximately 20,000 units per year.

Future unannounced diesel versions of CX-9, CX-3 and Mazda 6 could add at least another 10,000 units per year.

Mazda's financial plan calls for approximately 50,000 units in annual global sales increases for the next couple of years.

Mazda and General Motors look to fill the void in the sub-$45,000 diesel market vacated by Volkswagen and Audi in late 2015.

Mazda's (OTCPK:MZDAY) (MZDAD) U.S. sales have failed to increase materially on a net basis in 2017, despite the advent of outstanding new products such as the CX-9 and CX-5. On a global basis, unit sales increased by 1.6% for the year that ended in March 2017. Sales were 1.559 million units globally, up a modest 25,000 from the prior year. Tiny Tesla (NASDAQ:TSLA) was up 25,000 units from calendar year 2015 to 2016.

The automotive press is uniform in its praise for Mazda's industry leading exterior design as well as its driving dynamics. However, looking at the stock chart, you will see that the stock has been on a gentle downward trend since the second half of 2014, losing at least a third of its value.

When we look at Mazda's global operations and try to anticipate where things might go in the future, we notice two major things that stand out:

First, Mazda has no factories in the U.S. or Canada.

Mexico, yes. U.S. and Canada, no. Does this matter? It shouldn't and it might not. Yet it's noteworthy. If Mazda should ever feel the need to expand with a new factory in the U.S., perhaps the Nevada site currently owned by Faraday Future might be available. Or the one prepared by Lucid Motors in Arizona. Then again, Mazda could easily build one in a more traditional automotive location either in Texas or in the corridor between Indiana and Alabama.

Of course, that assumes that there is need for any new plant at all.

Second, Mazda sells no diesel vehicles in the U.S.

In Mazda's fiscal year 2017 (ending March 2017), 11% of its global unit sales were diesel. That's 167,000 out of the 1,559,000 global total. That doesn't sound all that dramatic, until you break out the numbers, first based on geography:

Japan: 36% of Mazda sales are diesel.

Europe: 31% of Mazda sales are diesel.

USA: 0% of Mazda sales are diesel.

Looking at Mazda's newest and most popular model, the CX-5 small to almost-midsize SUV, the diesel percentages are even larger:

Japan: 74% of CX-5 sales are diesel.

Europe: 58% of CX-5 sales are diesel.

USA: 0% of CX-5 sales are diesel.

Are you seeing what I am seeing here? Is there a disturbing pattern developing in front of your eyes?

Yes, there is. Mazda is leaving a lot of sales on the table, but not (yet) selling the CX-5 diesel in the U.S.

Mazda sold 112,235 CX-5 units in the U.S. in 2016, up 1% over 2015. 100% of them were gasoline, 0% diesel.

So far in 2017, Mazda's U.S. CX-5 sales are doing extremely well, up a little over 10%. If trends continue, sales should exceed 125,000, possibly hitting 130,000.

At 130,000, this single model's sales in one country - the U.S. - would be over 8% of Mazda's entire global unit sales. The CX-5 is Mazda's No. 1 priority - or at least should be.

What is the realistic potential for CX-5 diesel sales in the U.S.? Mazda will not reach the 74% diesel sales mix the CX-5 achieved in Japan or the 58% it achieved in Europe.

A better indication is the 15% diesel sales mix Jaguar Land Rover has averaged across a few models in recent months. 15% out of 130,000? That would be approximately 20,000 per year in the U.S. alone. Perhaps a few more in Canada and Mexico.

Mazda sold approximately 300,000 cars in the U.S. in 2016 - and is tracking for a flat 2017 overall - so 20,000 potentially incremental units of one of its most profitable models, the CX-5, especially as a pricier diesel, would be a huge deal. It would mean a potential 7% increase in sales for 2018, seeing as the CX-5 diesel goes on sale in the U.S. around October 1, 2017.

7% increase in sales, all in a most profitable product? Sure beats the 0% flat growth otherwise seemingly in store for Mazda in the U.S. this year.

But wait, there's more! Literally.

Mazda of course sells models other than the CX-5. In the fiscal year that ended March 2017, Mazda sold 374,000 units of the CX-5 globally, or 24% of its total volume. In calendar year 2016, the CX-5 was almost 38%.

That still leaves the majority of Mazda's sales with other models. Nobody expects the MX-5 Miata to get a diesel, and the U.S. market for a Mazda 3 diesel might be very limited.

However, the CX-9 is an obvious for a diesel, as are the Mazda 6 and the CX-3. One might suspect that the diesel mix of the CX-9 would be the highest out of those, and the other two a lower percentage mix. Still, let's say 15% as an average for the three of them, based on the other market indicators cited above.

For the first five months of 2017, sales of those three models were:

Mazda 6: 15,649

Mazda CX-3: 6,398

Mazda CX-9: 10,414

TOTAL: 32,461

Divided by five months, that's 6,492 per month. Then multiply by 12 months and we have an annualized sales rate of 77,906 units of those models. All in only the U.S., of course.

Then apply the 15% diesel sales potential, and it yields 11,686 units. Add to the approximate 20,000 CX-5 diesel potential in the U.S. market, round down a hair, and we are looking at 30,000 potentially incremental diesel sales for Mazda in the U.S. market.

That's a 10% potential bump to the 300,000 expected 2017 U.S. unit sales rate for Mazda. In the auto business, that would be a giant leap forward.

Now of course comes the counter argument: Why would the diesel version of the CX-5, or for that matter any future U.S. diesel version of the CX-9, CX-3 or Mazda 6, be incremental? Wouldn't they just mean that for each diesel sale made, there would be one fewer gasoline sale, resulting in only a tiny increase in revenue, thanks to the higher sales price of a diesel car?

Perhaps. But I think we can make a strong case as to why most of any Mazda diesel sales in the U.S. market would be incremental at this point.

Why? Well, remember that the only diesel player in this price-segment was Volkswagen (VLKAY), but VW withdrew in the fall of 2015. The closest player since then has been BMW (OTCPK:BAMXF) (OTCPK:BMWYY), but those diesels have started around $45,000 and mostly carried MSRPs much higher than that.

In Mazda's case, a CX-5 diesel with all but the barest-bone equipment would carry an MSRP around the $30,000 point, and even fully loaded would probably not break $40,000. That's for an attractive SUV, not a sedan.

A potential future CX-9 diesel would of course be at least $5,000 more, but a Mazda 6 or CX-3 would be a couple thousand dollars less. As you can see, these are approximately the Volkswagen price points where it sold Golf, Jetta and Passat diesels.

Volkswagen had in some cases diesel sales mixes far higher than 15%, and these buyers now have nowhere to go. Rather, Mazda's only competition for the CX-5 diesel will now come from the two General Motors (NYSE:GM) SUVs of similar size, shape and price: Chevrolet Equinox and GMC Terrain. Those are expected to be available in the U.S. market a month or two before the Mazda CX-5 becomes available in the U.S. this fall.

Therefore, it is just as likely that the Mazda CX-5 diesel sales turn out to be incremental rather than just taking away from what would otherwise have been CX-5 gasoline engine sales. I imagine most of these would come from former Volkswagen and Audi diesel buyers, as well as those who had also been looking at the BMW X3 diesel in recent years, but found it to be just a few thousand dollars too expensive for their tastes or wallets.

Adding diesel to the CX-5 is a very smart move by Mazda. As I showed in the calculations above, we could expect 20,000 incremental sales in the U.S. on an annualized basis. That would be a solid increase of Mazda's current 62,000 unit annualized global diesel sales mix of the CX-5.

Then add the additional just-over 10,000 annualized diesel sales of future U.S. diesel versions of the CX-9, CX-3 and Mazda 6, and a total 30,000 sales bump for the U.S. business would mean essentially an 18% increase to the 167,000 total Mazda diesel sales globally today (FY 2017).

The moral of this story: Volkswagen's loss will be Mazda's gain. And as I described above, also GM's.

Financial impact to Mazda: Management's stated goal at the April 28, 2017, report is to grow sales from 1.559 million units in FY 2017 to 1.6 million for FY 2018 and 1.65 million for FY 2019. In other words, increases of approximately 50,000 units per year.

A diesel CX-5 in the U.S. would contribute 40% to the first of those increases, and the three other additions another 20%. That's 60% of Mazda's one-year growth goal globally.

In other words, Mazda selling diesel cars in the U.S. market - starting with the CX-5 this Fall - would go a long way for Mazda to meet its near-term unit volume growth goals worldwide.

Disclosure: I am/we are long GM, F. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was long GM, F and GOOGL. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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