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Ford Motor Company (F), General Motors Company (GM), Toyota Motor Corporation (ADR) (TM): Do We Have a Surprise in July’s Auto Sales Release?

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Ford Motor Company (NYSE:F)Indicators of economic health have been producing inconsistent results, which has spread waves of confusion in investor circles regarding predictions of a turnaround in the US economy. There is no reason why the market should be dubious of the Fed’s actions regarding tapering of quantitative easing. However, there has been one macroeconomic indicator that has consistently performed well. You may have already guessed I am referring to auto sales.

Expectations

The Street is forecasting a July light vehicle SAAR of 15.9 million units, higher than last year’s 14.1 million and almost in line with June’s run-rate of 16 million. The channel checks suggest that the month got off to a strong start with robust showroom traffic during the July 4 weekend and that the momentum continued for the rest of the month.

Many readers tend to confuse 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.

Trends expected

Auto sales are expected to remain strong after a torrid June. However, investors are advised not to resume frothy views. The fact that consumer sentiment is as high as pre-recession levels has sent bullish signals to the market. The demand for autos continues to stem from interest in not only the large pickup segment, but also in passenger cars and CUVs (crossover utility vehicles). Interestingly, it appears that talk of higher rates is not having an impact on consumer demand for autos. The Street continues to expect sales in the second half of the year at a pace of 15.7 – 15.9 million, and continues to forecast 2013 full-year sales of 15.5 million units. 16 million landmark for 2013 seems highly unattainable given that it will require +16 million SAAR figure for all upcoming months (i.e. July-Dec), which seems pretty unrealistic.

Continued strength is anticipated in the large pickup segment, which is expected to represent 12.3% of sales for the total industry, up 160bp year-over-year and 50bps sequentially. Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) large pickup share are expected to remain largely flat sequentially given modest changes in incentive spend, with Fiat’s Chrysler to sequentially increase share given higher spend.

Expected performance of D-2

General Motors Company (NYSE:GM) sales are expected to be up 14%, with cars up 28% and trucks up 7%. GM faces easy comps on the car side where sales were down 4% last July. In the truck category, General Motors Company (NYSE:GM) benefited from the ramp up of the production of the newly launched K2xx. It is interesting to note that the new model year trucks were only 10% of overall truck sales last month.

I remain bullish on GM. General Motors Company (NYSE:GM) is expected to benefit from its upcoming K2XX full-size pickup truck launch, which will provide a significant boost to earnings over the second half of 2013 to the first half of 2014 timeframe.

Overall, the stock is a cheap buy. The stock is trading at a low 7 times earnings, well below the average consumer goods sector multiple of 13. The company is set to grow under the iron-fisted CEO Dan Akerson, who vows to remove the ‘Government Motors’ label from the company. The company is actively restructuring its European operations, which have long been a drag on the company’s performance. And above all that, the company is undergoing the biggest product launch since its inception. General Motors Company (NYSE:GM)’s current product portfolio is the oldest in the industry. GM’s management believes that it will take another 12 months to turn the whole portfolio over.

Tight inventory a problem for Ford

Ford Motor Company (NYSE:F) sales are expected to be up 15%, with cars up 5% and trucks up 20%. Like GM, Ford Motor Company (NYSE:F) also benefited from strong pickup demand. However, the tight inventory of some hot selling products like the Focus (37days), the Fusion (48 days) and the Explorer (37 days) weighed on the company’s overall performance. As such, 140bps sequential market share decline for the company is anticipated. This decline is more than General Motors Company (NYSE:GM)’s anticipated share decline of 70bps (as a result of slashed incentives).

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