Are the stocks of auto companies pricing in the weak consumer demand that we're experiencing?
U.S. auto sales were fairly strong in May. Most automakers came in ahead of expectations. Unfortunately, as we reach the end of June sales (manufacturers will officially announce their June sales on Thursday, July 1st), everything that I have heard thus far points to a fairly weak month.
For several reasons, at first glance the June sales results might not look that bad. First of all, the year-over-year comps are going to be reeeeally easy. Anything looks good when you're comparing it to Armageddon. In June 2009, U.S. light vehicle sales fell 27.7% versus the same period in 2008. In June 2008, sales fell 18% versus the same period in 2007.
So sales will be up year-over-year. Unfortunately, retail sales (sales to consumers) remain fairly week. A huge portion of any sales increase will likely come from less profitable fleet sales, aka sales to large corporations and more likely rental car companies. Manufacturers have been trying to cut back on fleet sales in recent years in an effort to increase their per unit profitability. Despite their best efforts to ween themselves off of fleet sales, old habits die hard.
Manufacturers have significantly increased light vehicle production over the past year in anticipation of a robust rebound in demand from the consumer, which really isn't happening. In May 2009, light vehicle production rose more than 85% year-over-year to over one million units. By all accounts, production remains strong in June. If we end the quarter with three million vehicles produced, Q2 light vehicle production will have increased nearly 70% versus Q2 2009.
So we have a ton of vehicles either on lots or in the pipeline, yet weaker than anticipated demand. It goes without saying, that is not a good combination. This is why manufacturers are pumping their extra cars into fleets. At some point, they may have to increase their spending on incentives for the consumer as well.
It will be particularly interesting to see what General Motors does in the coming months. The General is going to want to put lipstick on itself to make its sales look as strong as possible heading into a likely IPO later this year. I wouldn't be surprised if it used all sorts of tricks and trinkets, including fleet sales, higher incentives, perhaps a greater emphasis on subprime borrowers, etc... to pump up its sales volume heading into the end of 2010.
Back in May 2009, when I blogged that I felt that light vehicle sales had bottomed I estimated that sales would come in at 9.5 to 10 million units in 2009. They ended up being a little stronger than that, 10.43 million units. In October of last year I said "A level of around 11 million units seems reasonable for 2010, but that will likely have to be refined as the year progresses." Looking at sales thus far in a linear fashion without all of the seasonal adjustments, we're on pace for around 11.1 million units in the United States in 2010 (4.63 million units through May). I still think that we'll end up somewhere in the 11s. Traditionally, auto sales and the unemployment are very closely correlated. If we don't see a meaningful improvement on the jobs front in the near future, and I'm not holding my breath, sales for the year could come in at the low side of or even below most analysts' initial estimates.
I haven't crunched the numbers for any specific automakers, like Ford, or the likely GM IPO, but I suspect that these stocks are (or will be in the case of the early estimate of how much GM will make in an initial offering) pricing in a stronger recovery in light vehicle demand than what we are seeing.