Why Sales Are Booming at Ford and General Motors – Motley Fool

Posted: Tuesday, December 01, 2015


General Motors’ midsize Chevrolet Colorado pickup has been selling at a torrid pace all year, helping GM to a nice market-share gain. Image source: General Motors.

What’s happening: U.S. auto sales appear to be headed for a record in November, thanks to continued strong consumer demand that might be getting a boost from automakers’ discounts.

Sales at a record pace: Forecasts from analysts at TrueCar and Edmunds both predict that this will be the best November ever for U.S. auto sales, with the widely watched seasonally adjusted annualized selling rate (SAAR) topping 18 million for the third month in a row.

The SAAR measures the pace of auto sales: The number estimates how many vehicles would be sold in a calendar year at the pace seen over the given period. A pace over 18 million is extremely brisk: The most vehicles ever sold in the U.S. in a calendar year was 17.4 million, a record set in 2000.

Regardless of the pace in November, that record looks set to fall once 2015 comes to a close. A forecast published last week by J.D. Power and LMC Automotive projects that U.S. auto sales will total 17.5 million by year-end — and they predict a year-over-year decline in November.

(How can the sales pace rise while year-over-year sales fall? It’s because this month has two fewer “selling days” than November of last year. “Selling days” exclude Sundays and holidays when many new-car dealers are closed.)

What’s driving the boom: J.D. Power and LMC Automotive note in their report that average transaction prices continue to be near all-time record levels. They argue that low-cost leases and longer-term loans are fueling the demand for more expensive vehicles.

According to their report, leases accounted for 27.7% of retail new-vehicle sales in the U.S. this year through the first two weeks of November, up 2 full percentage points from 2014. And 34.4% of new vehicles are being bought with loans with terms of 72 months or longer, up 2.2 percentage points from 2014.

But despite the high average transaction prices, discounts appear to be on the rise. TrueCar analysts estimate that average incentive payouts will be up 6% in November versus a year ago.

Not all of the automakers are playing that game, though: TrueCar says that per-vehicle spending on incentives will likely be up only modestly year over year for both Ford (NYSE:F) and General Motors (NYSE:GM), while Fiat Chrysler (NYSE:FCAU), Toyota, and (especially) Volkswagen will show double-digit year-over-year percentage increases. 

While it’s up year over year, incentive spending at both Ford and GM is expected to be lower in November than it was in October. Ford’s much-touted “Friends & Neighbors” discount program, expected by some to spur an industrywide rush toward more generous incentives, appears instead to have been something of a dud. The Blue Oval’s sales are expected to rise only modestly in November, and the company will end the program a month earlier than expected after some dealers reported that customers found the program confusing.

Meanwhile, General Motors appears to be maintaining its newfound discipline around incentives. TrueCar does expect GM’s payouts in November to rise 6.1% versus a year ago, but there’s an explanation: GM’s dealers are clearing out stocks of the Chevrolet Malibu and Cruze sedans in anticipation of all-new models that are set to arrive shortly. TrueCar expects GM’s incentive payments to be down 3.6% versus October.

The upshot: No significant signs of weakness yet, but more growth isn’t likely
Auto sales, and the auto industry, are cyclical, rising and falling with the economic cycles. Auto sales are generally a “leading” economic indicator, meaning that a decline in auto sales can often be an early warning sign of a weakening economy.

With transaction prices still very strong and the sales pace near a record level, we’re not seeing any meaningful signs of weakness. But it’s likely that we’re near the peak of this cycle: While it could be a couple of years before we see significant declines, the strong year-over-year growth that we’ve seen over the last few years is probably past.

For those who hold shares of Ford, GM, or other automakers that have reported strong profits recently, that’s not a “sell” signal. Those strong profits could continue for several more quarters before things start to slip, and both Ford and GM should continue to pay solid dividends. But it’s a sign that the big surge of growth is probably mostly behind us, at least for this economic cycle.

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