North America

August Monthly Auto Sales Preview: Ford (F) and General Motors (GM)

By: Craig Bowles

The leading aut­omakers are scheduled to report monthly sales on Friday, September 1st.

Summary:

  • Automakers are expected to report a 16.6 mln seasonally adjusted annual rate (SAAR) for August sales. August 2017 would represent the sixth month in a row under 17 million SAAR, the longest period since a six-month streak from September 2014 through February 2015, according to Kelley Blue Book. (Spring and summer are historically strong months.)
  • Results for August 2017 have 27 selling days compared to 26 days in August 2016.
  • Gasoline prices had moved up to around $2.40/gallon in April and May for a 2017 seasonal peak before falling to $2.23 by the end of June. (Current is $2.35) February 2016 was $1.70/gallon followed by an early June 2016 $2.38/gallon seasonal high. (AAA)
  • Kelley Blue Book expects slowing of 1 to 4 percent in 2017 with sales in the range of 16.8 to 17.3 million. Rising supply and interest rate hikes remain areas of worry. Another headwind facing the industry is off-lease vehicles are returning to the market as low mileage, relatively-new used vehicles. According to Cox Automotive data, 3.6 million lease vehicles will return to the market in 2017, up from 3.0 million in 2016. The fastest-rising class of loans is now 73–84 months and already at nearly 1/3 of new vehicle loans. Interest rates on new-vehicle loans fell to a six-month low in July. (Edmunds)
  • Auto loan defaults have been rising since 2014. (Bloomberg.com) Wells Fargo shows auto loans having fallen off since the summer of 2016. (zerohedge.com)
  • According to data from the Federal Reserve Bank of New York, the number of car loans delinquent by at least 30 days grew to $23.27 billion in the fourth quarter compared to the previous $23.46 billion high posted in the third quarter of 2008.
  • 2017 is the eighth consecutive year of annual growth and the auto industry’s longest such streak in more than 50 years. The NY Fed’s report focusing on how a rate hike effects the auto industry suggests that a 1% increase in rates would cause car production to fall at a rate of 12% a year and sales to fall at 3.25% a year
  • US auto stock prices are flat-to-lower for close to 3 years despite strong sales. Zero Hedge has pointed out the reason for this is that the automotive inventory-to-sales ratio has been rising since 2011. (StLouisFed.org) Goldman expects pent up auto demand from 2009 through 2012 to be cleared through by 2017 and forecasts a 15 mln SAAR by the end of the decade. U.S. composite economic indexes show an improved setup except for lagging indicators that includes services inflation and debt outpacing the actual economy. Growth rates: Leading Economic Index 4.6%, Lagging Economic Index 2.4%, Coincident Economic Index 2.1%, Leading Inflation Index 1.2%.

 

Ford Motor (F)                                                                                                  Expected Release Time: 9:15 a.m. ET

Overview: Ford Motor (F) Q2 earnings beat analyst expectations due to a lower-than-expected tax rate (10% versus 30%). Rising prices helped the F-Series truck sales drive profits but this is unsustainable with price increases running at five times the industry average during the quarter. The company will petition to avoid an immediate recall of 2.2 million vehicles with Takata air-bag inflators that the Japanese auto supplier declared defective. Expect earnings to be 50% lower over the next 18 to 24 months, heavy spending on the car of the future, and more use of data-collection tools. “Peak auto” risk having intensified should help push Ford to concentrate on their more profitable truck business and out of some of their problematic automobile lines. Ford had a 77-day supply of vehicles as of August 1. (Ford.com) Ford announced in May that they would cut 10% of their global workforce. Ford and GM produce around 40 vehicles per employee. Twenty years ago, a GM-Toyota joint venture produced 74 vehicles per worker. Tesla’s automation allows them to produce only 10 vehicles per worker.

Technical Review: Ford shares found resistance around the $17 level in 2013 and 2014. Since then, the down trending 200-day moving average area has acted as a magnet. Seasonally, auto stocks favor the first half of the year after February, so Ford’s weakness this year has been atypical.  Point and figure charts show that a massive diamond patter since 2010 is showing signs of breaking down. (Chart courtesy of StockCharts.com)

Estimates y/y

Edmunds.com:     -2.4% (Source: Edmunds.com)

Kelley Blue Book:  -3.5% (Source: KBB.com)

True Car:               -x.x% (Source: TrueCar.com)

Average:               -3.0%

 

 

General Motors (GM)                                                                                              Expected Release Time: 9:30 a.m. ET

 Overview: General Motors (GM) is making progress on reducing inventory and Barclays expects an inevitable incentive push in the coming months (especially in large pickups). Plans are to cut production by 150,000 cars during the second half of the year. GM took its 2017 SAAR guidance from mid-17 mln to low 17 mln. The company is considering killing production of some slower-selling cars, such as the Chevy Sonic, which is built at the automaker’s Orion plant in Michigan. Deutsche Bank believes the low valuation of General Motors will bring more pressure from activists to potentially to spin off the better growth businesses. Pension obligations being underfunded by over $20 bln could complicate efforts to fix GM’s inefficient capital structure and unlock significant value for all shareholders. $3 billion in debt was issued to help with the pension problem which apparently is a new trend for pension strained companies.  GM had a 104-day supply of vehicles as of August 1, the most since November 2007. (GM.com) The worry is that high inventories could start a price war similar to what happened in 2007. General Motors plans to test thousands of driverless cars in 2018. The Supreme Court denied General Motors’ legal efforts to use its 2009 bankruptcy to block lawsuits over injuries and financial losses related to the carmaker’s long-ignored ignition switch defect. The company plans to launch 10 new electric vehicle models in China by 2020.  India’s GM dealers are threatening to sue if not adequately compensated for being forced to close by year-end.

Technical Review: GM shares have found resistance at around $38 since early 2011 but shows higher lows since 2015. The May low was $31.57. GM and Ford stocks tend to move similarly but diverged since mid-2016 when GM’s stock became relatively strong. Such a lengthy divergence between the two stocks is unusual and possibly more fundamental. GM’s multi-year balance area mostly between $26 and $36 is being tested on the upside. (Chart courtesy of StockCharts.com)

 

Estimates y/y

Edmunds.com:          1.9% (Source: Edmunds.com)

Kelley Blue Book:       6.1% (Source: KBB.com)

True Car:                     x.x% (Source: TrueCar.com)

Average:                    4.0%

 

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