7/2/2009
By David Silver, Research Analyst

In our last sales update, we commented that the green shoots we saw during May looked more like weeds than anything else. Today's results are a new breed of grass; a hybrid of the stringy green plant and weed that require the perfect balance to turn into grass, otherwise, we are destined for more weeds.  Ford was the clear winner of the month, reporting only a 10.9% decline compared to June of 2008.  However, the biggest negatives that we saw were again from General Motors and Toyota (TM, which saw declines of 33% and 32%, respectively. Much of the talk from the Street before the results were released was that industry seasonally adjusted annual rate of sales (SAAR) would increase to above 10 million units for the first time since December 2008.  That however did not come to fruition as SAAR was 9.69 million vehicles down from 9.91 million in May, but still up from earlier in the year.  January marked the first time in 26 years that SAAR slipped below the 10 million mark, between the years 2000 and 2007, auto sales averaged 16.8 million units.  Every automaker (not just Chrysler and General Motors) has been cutting production to try to become profitable with a 10 million unit market in the United States, and while many of the companies are much closer, the entire industry would still lose money with that size of a market. 

Chrysler went into bankruptcy and re-emerged a "New Chrysler" and is again producing cars.  The silver lining is that many dealerships (of the 789 that were not closed) were running on only a few days of inventory left and many of the hotter selling vehicles were sold out.  The first seven plants reopened June 28 (six in the United States), while General Motors is trying to follow a similar path and has idled many of its plants during its bankruptcy proceedings.  Speaking of which, does anyone else realize that Fritz Henderson, CEO of General Motors has issued more ultimatums and threats than months he has been at the head job?  While the situation may be dire, the boy keeps crying wolf that liquidation is the only way. Another interesting little tidbit about the General Motors saga is that both the Administration and management are trying to push around the courts.  Don't you just love checks and balances, I know I do. 

With all the current incentives, I hope that the industry does much better over the next few months.  However, with the employment situation the way it is, it is hard to foresee a massive rebound in auto sales.  Cash for clunkers and other tax incentives, along with some pent up demand, should give a boost to auto sales in the second half of the year.  However, we expect to continue to see "less bad" results through the end of the year.  Our optimistic hope is that by October, we begin to see year over year increases, partially as a result of easy comparisons, added incentives, and an improving economy. 

June was another busy month for the auto industry, as Chrysler re-emerged from bankruptcy as a new Company run by Italian automaker Fiat, the UAW, and the US and Canadian governments.  General Motors entered into bankruptcy with a goal of emerging in 60 to 90 days and to re-IPO during 2010. Toyota announced it expects another annual loss and that it is completely redoing its business plan.  Through all this, Ford continues to chug along.  Remember back in 2007 when the government passed the Energy Bill that would give up to $25 billion to the automakers to help the industry refit its facilities? Well the government finally released the first bit of that money, with $5.9 billion going to Ford, $1.6 billion going to Nissan, and $465 million going to Tesla Motors.  Tesla is currently the only automaker in the United States that produces a fully electric highway ready vehicle.  Additionally, Daimler took an equity stake of nearly 10% of the electric car maker.  

Ford continues to impress me with how well it is doing, and its new additions to its fleet including the new Taurus and the Fusion Hybrid have catapulted GM with respect to higher fuel efficiency vehicles.  However, we maintain that  the industry is not out of the woods yet. Auto sales continue to be dismal, and the economy still has a lot of job losses it needs to swallow.  In previous articles, we said that we believed that more production still has to go offline to meet the current demand levels.  The industry SAAR is improving, but not at a fast enough pace to save Ford, Toyota, Honda, Nissan, or Daimler even more pain.  The mantra "less bad" continues to live in the auto industry.

Through the remainder of the year, we expect to see continued sequential improvements with the strongest months coming in October and November as the economy begins to show its first signs of growth (and not just the "green shoots"). That being said, we still like the foreign automakers, Toyota and Daimler being our favorites. However, we believe the most upside right now is in Ford.  The Company has an ambitious vehicle lineup, and while the new Taurus has some big shoes to fill, it will be a great improvement for the iconic Dearborn, Michigan company.