Ford Cruises Despite Slump In U.S. Auto Sales For September

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GM: General Motors logo
GM
General Motors

The unusual timing of Labor Day combined with uncertainties related to the government shutdown marred U.S. automotive sales in September. Overall, sales for the month were down 4.2% on a year-over-year basis. [1] This was the first time in two years that auto sales posted negative sales growth. This September also had fewer selling days, so the drop wasn’t totally unexpected. However, it was the magnitude of the decline that was larger than anticipated.

GM’s light truck sales tanked 6.5% on a year-on-year basis. The new Silverado, which recently hit the showrooms, saw its sales plummet 11%. But GM was quick to point out that the company was extremely disciplined about the pricing. The company’s average transaction price was $3,000 more than the previous year figure and about $800 more than that in August. [2] Moreover, the automaker might have struggled to get the adequate number of refreshed vehicles to the showrooms, which is quite common at the time of a model changeover. But GM needs to get its operations right soon if it wants to improve its profits.

The automaker’s North American margins already trail those of Ford’s. For the first two quarters, GM’s American margins stood at 7.3% compared to 10.5% for Ford. [3] Usually, anything above 10% is considered excellent in the automotive industry. GM absolutely needs to get its pickups sales right to boost its margins.

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Pickups are critical to automakers’ profits since they have fatter margins compared to mainstream cars. Thus, any decline in their sales can disproportionately affect the margins.

Ford Remains Strong

On the other hand, Ford’s sales rose 5.7% helped by strong performances from the Fiesta, the Fusion and the F-Series. [4] Ford was one of the few automakers that could manage to grow its sales in an otherwise disappointing month. The automaker has been benefiting from a slew of model makeovers in the last two years. Not only is Ford offering better, more fuel efficient vehicles, its image has improved vastly and is no longer seen as a company making big, gas-guzzling vehicles.

Sales of the F-Series pickup surged 11%, a sign that customers might be ready to ditch newer, more expensive pickups (such as the new Silverados) in place of the more traditional and less expensive models. Pickup sales have been impressive this year backed by a strong housing market. Pickups are used in construction activities and therefore a strong housing market bodes well for the demand of pickups. Despite the blip in September, pickup sales are up 14% compared to the 8% gain witnessed by the broader market. [1]

As the U.S. automotive market size approaches the pre-recession levels, we should see the rate of expansion slowing down. In the last couple of years, the auto market has benefited from the pent-up demand as the average age of a vehicle has climbed to more than 11 years. Once the growth rate slows down, the automakers will push for more profitable vehicles such as luxury cars and pickups. GM, Ford and Honda have already made significant investments to resuscitate their luxury brands. Cadillac and Acura have seen moderate successes with their sales while the demand for Lincoln has yet to pick up.

We have a $38 price estimate for General Motors, which is about 10% above the current market price.

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Notes:
  1. U.S. auto sales,wsj.com [] []
  2. Are GM’s New Pickups Too Expensive?, October 2, 2013, businessweek.com []
  3. GM 10-Q []
  4. Ford Investor Relations []