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Ford Motor Company (F), General Motors Company (GM): Three Things to Learn From May Auto Sales

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Ford Motor Company (NYSE:F)The seasonally adjusted selling annual rate, or SAAR, has been a key measure of the progress of the US auto market. May auto SAAR came in flying at 15.3 million, well above the consensus figure of 15.2 million. The SAAR result was above the May 2012 number of 13.9 million and also ahead of the April 2013 number of 14.9 million.

Those who follow the industry know very well that the SAAR figure came in weaker than anticipated for both March and April. This sent some hiccups in the investor circles that are betting on a strong revival in the auto market given the easy availability of credit, high average age of on-road cars and high replacement demand. Now the important question is, is the auto industry back on track to display strong gains?

What is SAAR?

Before we discuss the key takeaways of this month’s auto sales, it is important to understand what SAAR is. Many readers tend to get confused between the actual sales and the SAAR figure. While the actual sales figure shows us the actual amount of vehicles (in units) that have been sold in a particular month, the SAAR figure depicts the selling rate of vehicles for a particular month. By this I mean that a SAAR rate of 15 million for a particular month indicates that the auto industry is on pace to sell 15 million vehicles on an annual basis.

Key Takeaways

Within last month’s result, there are three key takeaways:

SAAR back on track

Whereas the somewhat weak April SAAR of 14.9 million yielded concerns for some, the 15.3 million print posted in May showed that the industry is still on pace for a healthy 2013. With first half sales largely in the books and with SAAR averaging 15.2 million year-to-date, the Street remains comfortable with 15.5 million full-year 2013 estimate, expecting SAAR in the 15.7 to 15.9 million range for the second half of 20113 (consistent with guidance by Ford Motor Company (NYSE:F), largely driven by continued strength in large pickups. Beyond this, little upside to the 15.5 million estimate can be seen, as it would require SAAR number of 16 million+ in the second half, which seems quite unlikely.

Strong pickup sales

The large pickup segment was up 24%, solidly outpacing the rest of the industry, which was up only 6%. The large pickup mix as a percentage of total sales was 11.8%, coming in 150 bp higher on a year-over-year basis. Moreover, it was the best May for large pickup mix since 2007, when the large pickup mix was 12.8%.

The strength in pickups has significantly helped the D3 – i.e., Ford Motor Company (NYSE:F) large pickup sales were up 28%, allowing Ford to reach share of 17% for the entire industry for the first time in two years. General Motors Company (NYSE:GM) saw a 23% rise, which was higher than anticipated given lower large pickup incentive spend.

With inventory trimmed down to 93 days from 103 days at the end of April, the market has increased confidence that General Motors Company (NYSE:GM) will be able to enter the launch of its new trucks with strong price discipline, with tailwinds likely to be realized in the second half of 2013.

Did a weak yen impact incentives?

There are no signs of a weak yen impacting incentives as yet. On average, incentives on cars for the Japanese-three (NissanToyota and Honda) were down ~$375 year-over-year but up about $265 month-over-month. A planned inventory reduction from Nissan appears to have been the main culprit for the month-over-month increase.

Inventories for the Japanese-three are now at reasonable levels and no major increase in car incentives in June is expected from the trio. Increasing content/vehicle options may be the preferred way for the Japanese OEMs to reestablish competitiveness given the weaker yen. However, it should be noted that consensus expected Nissan to cut incentives in conjunction with reductions in list prices on seven models; this did not occur in May as Nissan’s average incentive spend on cars increased ~$530 (on a month-over-month basis).

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