1/6/2010
By David Silver, Research Analyst

More Articles by David Silver

The year that every automaker would like to forget is now officially behind us.  December's monthly auto sales figures are in and the final month of the year put an almost giddy feeling on the final month of the year.  General Motors grabbed most of the headlines in the final weeks of December with its Fire Sale announcement for Pontiac and Saturn models in hopes of working through its inventory.  GM now estimates that roughly two months worth of inventory remains of the two brands combined (or about 1,700 units).  Seven of the nine automakers that we monitor saw year over year increases for the month of December, led once again by Hyundai (HYMLF), Toyota (TM), and Ford (F), which saw sales increase 40.6%, 32.3% and 32.8% respectively; however, the full year figures show a different story, with most automakers still reporting that sales fell compared to last year.  Despite the strong improvements with Cash for Clunkers and the last two months of the year, it was difficult to offset the 40%-50% declines in the beginning of the year.  Chrysler saw a 3.7% decline for month, which brought the annual figure to a 35.9% decline, however, the Company did extend its 0.0% APR offer to all 2010 models.

It is a very different industry today than it was twelve months ago. A year ago at this time, Rich Wagoner, CEO of GM (fired), Robert Nardelli, CEO of Chrysler (fired), Alan Mulally, CEO of Ford (still has his job), and Ron Gettlefinger, head of the United Auto Workers (UAW) union (still has his job too) were taking flak from Congress about showing up to a hearing asking for help in private jets.  Since that time, Congress has doled almost $1 trillion in aid, two automakers have entered and exited bankruptcy, and the world has bounced back from its brink of disaster mentality.

Ahead of the announcement, we had modeled for industry seasonally adjusted annual rate of sales (SAAR) to be in the mid-10 million range for the month of December, which would put the full year figure around 10 million units adding in the previous months. GM estimated that industry SAAR for December would be roughly flat with that of November; while Ford estimates that full year SAAR was approximately 10.4 million units.

Toyota came close to catching GM in terms of U.S. sales in December. Toyota said it sold 187,860 vehicles in the U.S. during the month compared with GM, which sold 193,824 cars and trucks once the auto maker's noncore brands of Pontiac, Saturn, Hummer and Saab are subtracted. GM has agreed to sell Hummer, and is in the process of killing Pontiac and Saturn. The fate of Saab is unclear.  On an interesting note, Ford wasn't far behind.

Looking into the monthly data and financial statements from Ford, one can't help but to root for the underdog.  The Company didn't take government money (definite positive), but at this time last year it was thought to be the Company on the worst financial foundation.  Two debt for equities swaps, a VEBA deal, and a Motor Trend Car of the Year later (Ford Fusion) and Ford's stock is at levels not seen since 2005.  So why is Ford at these levels, and the short answer is Mr. Mulally, as Harry Truman said, the buck stops here. Ever since September 2006 (when Mr. Mulally was named CEO), he has made some extremely timely decisions.  Near the top of the list is the sale of Jaguar and Land Rover. At the time, we thought the Company could have received more for the two brands, but in hindsight, Mr. Mulally pulled the trigger at the right time and that cash influx allowed Ford to avoid the government handouts. However, the most important item as to why Ford is seeing this resurgence is its products.  The Detroit automakers have historically been behind the curve with respect to what consumers want.  However, with the new Fusion, Focus, and Edge (and the re-release of the Taurus), Ford has a Motor Trend car of the year, one of the most popular cars in the cash for clunkers program, and one of the most popular (and most fuel efficient) crossover vehicles.  That has been the key to success for the Dearborn, Michigan company, having a lineup of cars that excels in quality as well as being on the cutting edge with respect to technology.  The Company continues to take market share, but not just from the shuddered brands of General Motors, but also from the likes of Toyota and Honda.

Alright, so now let's look into our crystal ball and determine what we expect for the next 12 months.  The restructuring plans for the automakers saw a hockey stick type growth for the industry, and we feel that is just not attainable.  It would be great if that fairy tale came true, but the country still has to deal with massive loads of debt (both government and individual) and double-digit unemployment rates.  Hopes for the auto market returning to the 16 – 17 million unit range of the early 2000's is not a mere three years away, we feel that the market will again hit 15 million units during 2015 and not reach the 17 million level until 2020.  I digress, back to the next twelve months.  It will be an environment of slow growth until there is a meaningful improvement in employment.  Once that occurs, the growth rate will accelerate.  For the first seven months of the year, the industry is going up against extremely easy comparisons.  There will be many caveats thrown out in the coming months (GM was on the verge of bankruptcy so sales across the industry were dismal, or Chrysler was shutting down plants for weeks at a time).  Additionally, there was a rumor of the cash for clunkers program in April and May so that forced many Americans to put off buying a car until they could get some help from good ole' Uncle Sam. 

Ford is still my favorite in the industry as it has the most room for growth.  Toyota is still a behemoth in the industry, but when you are on top, it gets harder and harder to surprise.  Ford has taken market share in 14 of the past 15 quarters and should continue to do so in the coming quarters.  Hyundai has also been a monster over the past six months, but it is working off a very small base. For example, Hyundai sales for the month of December were up 40.6% year over year, but when compared to General Motors, still only accounted for 16.2% of monthly sales. 

David Silver
Wall Street Strategies