3/4/2008

February Auto Sales: Another Pothole for General Motors
By David Silver

Yesterday, automakers reported auto sales for the month of February and the figures should not have come as a surprise to anyone.  February of last year was the best month for auto sales in 2007, but this time around consumers around the nation are fretting over a possible U.S. recession and being shut out of auto loans given the state of the credit markets.

General Motors (ticker: GM) reported a sales decline of almost 13% for the month, Ford's sales slumped 7%, Chrysler's tumbled 14%, and Toyota's fell 3%.  Honda was able to buck the trend, posting a 5% increase in U.S. sales as booming sales of its small cars and crossovers picked up the slack from its slumping Ridgeline pickup and luxury sedans.

North American automakers have become so dependant on sales of the gas guzzling light truck and SUVs that it will take some time to wean themselves off and shift operations towards more fuel efficient and hybrid models.  General Motors and Ford saw truck and SUV sales decline 19.0% and 5.6%, respectively in February.  Even Toyota, which sports the most extensive hybrid vehicle lineup in the industry, posted a slight decline in truck sales of 0.8% as the extensive marketing campaign for the Toyota Tundra continues to help sales.  GM, Ford, and Toyota saw total light vehicle sales decline 12.9%, 6.9%, and 6.6%, respectively.

GM and Ford are actively attempting to restructure their operations and car lineups to meet the changing marketplace, with the former appearing to be performing better.  One would have hoped that the U.S. automakers would have seen this trend coming but the industry has been slow to react.  That said, the real growth story of the automobile sector is not in sales for the U.S. but rather for sales overseas, specifically China, Russia, India, and Brazil.

There used to be a common adage that “as the auto industry went, so went the U.S. economy,” however, despite the slowdown in both, that just doesn’t hold true anymore.  Yes, the overall economy is slowing down, and yes auto sales are declining, but the U.S. economy’s dilemma is much more complicated.  The CEO of Nissan (which owns a 44% stake in French automaker Renault), Carlos Ghosn, said “We are very lucid on the situation of the industry that there is a recession in the United States, at least in the car market.”  He went on to say that the American auto market “will not stay in recession for a long time.”

While we agree with Mr. Ghosn that the auto industry is suffering from slower sales, higher costs of labor, and higher raw material expenditures, we do not believe it is in a recession.  We do agree with him that it will not be a prolonged slowdown and that the industry will accelerate in the second half of the year as the Fed’s monetary actions of the past six months begin to filter through and boost the economy. 

For the first half of 2008, we are expecting the industry to be relatively range bound as a weakening economy and higher raw material costs offset any cost savings from restructuring or the new UAW contract.  However, in the second half of the year, we are expecting our favorite in the industry, General Motors to outperform the others in the industry.  Support for GM being our favorite, compared to others in the industry, includes:

• General Motors has strong exposure (better than Ford and Toyota) in fast growing markets such as China, Russia, India, and Brazil.
• Toyota will be the best performing auto maker in the struggling mature North American market, but the Camry’s lead continues to be eaten away by the new Malibu, Ford Fusion, and Honda Accord.
• GM is ahead of Ford in the restructuring process and will see the benefits of an improving economy quicker than Ford

Written by David Silver, a Research Analyst for Wall Street Strategies (www.wstreet.com) covering companies in the Transports, Autos, and Beverage sectors.