8/31/2010
By David Silver, Research Analyst

As the calendar gets ready to switch to September (gosh where did the summer go?), we get ready for that fun day when the automakers release how many vehicles they sold over the past month.  Throughout the summer (and even late spring), auto sales have been weakening as the strength of the economic recovery came into question.  Additionally, after the incentive push following Toyota's (TM) massive recall, incentives have been reduced which has also kept consumers out of the showrooms.  During the month of August, incentives are said to have increased approximately 1% to an average of $2,864, however, sales are still expected to be down dramatically both year over year and sequentially.  Coming into August, there was no way this month (and September) would escape without some sort of asterisk.  August 2009 saw the cash for clunkers program give a bump to auto sales.  If we were able to see growth from last year, that would send automakers much higher, however, there is next to no chance for that. I have to leave the door open for the surprise out of left field, but I expect sales to be down almost 20% to 11.4 million vehicles, down from the 14.2 million in August of 2009. 

The struggling economy and lackluster job growth has helped to push consumers to try to get that extra few months out of their current vehicle.  Many people that could afford to get that new car have already done so, and many other Americans, worrying about if they will have a job come year's end, are willing to invest the $200, $500, $1,000 to keep their vehicle running instead of taking on more debt.  There are some great new models hitting the market for the 2011 model year, however, the end of year enticements just haven't generated the buzz that many in the auto industry were hoping for. 

Since peaking in March and April, sales growth has been trending lower.  The following chart shows just how volatile auto sales have been over the past year.  After seeing declines of more than 20% in July and more than 40% in September of 2009, the market rebounded as much as seeing approximately 40% growth in March and April of this year.

 
Our favorite in the industry is still Ford (F), but even the Dearborn, Michigan company won't escape the weakness for the month.  There are definitely going to be some silver linings in the reports.  We are looking for the higher margin light truck and crossover sales to continue to improve.

Speaking of trucks and crossovers, the government is considering giving a grade to vehicles.  One would hope it would be for safety and other overall standards; however, one would be wrong.  In a jointly released proposal by the Environmental Protection Agency and the Transportation Department, a large letter grade for fuel efficiency would be fixed to a vehicle's windows alongside the price-and-mileage labels currently affixed to the windows of new cars at dealerships.  While this could be a good way to push more fuel efficient vehicles, the comparison of the Toyota Prius or Nissan Leaf with a Chevy Silverado just seems pointless to me.  Using the proposed framework seems tantamount to telling the public that they are stupid.  My question is, do you really need a big letter on the side of a vehicle to tell you that an F-150 uses more gasoline than Toyota Corolla?

The idea isn't a bad idea, but it should be a comparison between similar vehicles (compare the Corolla and the Civic or the F-150 and the Dodge Ram) and could even expand into other categories as well.  For instance, give safety standards, airbags, brakes, even some of the electronics in the vehicle a letter grade and put it in the window.  That would be a good way to give an accurate grade for a vehicle, and it may even help the Department of Transportation better monitor what Americans are driving so we don't have a sticky gas pedal problem again.  The following table outlines my expectations for the nine companies we monitor monthly sales for. 

Disclosure: Analyst owns shares of Ford (F).

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David Silver
Wall Street Strategies