Consumer demand for light vehicles remains very, very weak
The headline numbers look pretty solid. Light vehicle sales in the United States are up nearly 15% year-over-year through July. However, the real story paints a much bleaker picture, particularly for the "Big 3" domestic manufacturers. The following Automotive News article contains fantastic information on these automakers growing dependence on "fleet" sales to pump up their reported sales numbers (subscription required):
Fleets fuel surge at GM, Chrysler
Internal documents show retail sales are down through July
For anyone who isn't involved in the industry, fleet sales represent large numbers of units sold to businesses, such as rental car companies, and the government. They are usually looked upon as being significantly lower in quality and less profitable than retail sales to actual consumers.
Year-to-date, General Motors' total reported sales are up a solid 13% year-over-year, however if one backs out the company's massive increase in fleet sales GM's sales would actually be down for the year...and that's from a disastrous 2010. General Motors fleet sales are up a whopping 53% YTD. I'm not surprised that The General is reaching into its bag of tricks to make its sales numbers look as attractive as possible heading into its IPO this fall.
The story is even worse at Chrysler. Without its massive fleet sales, sales for Chrysler, Dodge, and Jeep would actually be down 19% year-over-year.
For the sake of comparison, YTD only 15% of Nissan's sales and 9% of Toyota's sales are fleet.
Fleet sales are high at Ford Motor Company (F) as well, up 35% year-over-year to (interestingly) 35% of its total U.S. sales volume, but at least Ford's retail sales to consumers are reasonably strong as well. Ford's retail sales are up 19% Y-O-Y. Plus in July, Ford supposedly cut its fleet mix to 25%.
The bottom line here is that consumer demand for light vehicles in the United States remains extremely weak. Even with this surge in fleet sales, look for the year-over-year numbers for the industry to look terrible in August. The year-over-year comps are extremely tough this month because a year ago U.S. sales were pumped up by the government's "Cash for Clunkers" program.
To their defense, Chrysler and General Motors claim that their reliance on fleet sales will drop in the second half of 2010. Both stated that they expect fleet sales to only represent 25% of their total sales volume this year. If that does indeed happen and consumer demand doesn't rebound soon, look for them...and the industry to report some very weak sales numbers this fall.
One can often find great opportunities in post-bankruptcy stock offerings. Many of these events are a special situation investor's dream, but this investor plans on staying the heck away from General Motors IPO, which rumor has it may happen as early as later on this year. Perhaps I'm just too close to this industry to see the forest through the trees. GM has certainly cut its debt load and has restructured itself to be profitable in an industry with much lower sales levels than the 17 to 18 million units that U.S. saw during its heyday several years ago. But the U.S. auto market is so weak and GM has been poorly run for so long that I just can't bring myself to invest in it.
Many people look at General Motors' strong sales in China and say that they are enough for Mr. Market to justify giving it a larger market cap than Ford, but sales in China are slowing fast. Chinese vehicle sales dropped 11.9% in July versus June. Year-over-year Chinese sales were up only 14.4%. That's a far cry from the 45% total industry sales increase that the country experienced in 2009. Time will tell whether this is a sign of a significant slowdown brewing in China or just a blip on the radar, but one can hardly say with 100% certainty that the rapid growth there is the slam dunk that it has been in the recent past.