Times are great for auto dealers. The seasonally adjusted annual sales rate for new vehicles topped 16 million in August, the first time it reached that mark since November 2007. But car sales are cyclical by nature, and it’s not clear how long this upsurge will continue.
Anticipating an inflection point, or turn, in the sector would be very helpful for investors trying to judge a good time to exit a bullish position or set up a bearish one in the auto sector. One calculation — the “auto dealer’s days of sales in inventory” — may help you identify such an opportunity.
What is the “days of sales” indicator and why is it useful?
This metric basically takes an auto dealer’s dollar value of inventory at the end of a period, then divides it by the average vehicle sales reported per day in that period.
For instance, if dealer X has $100 million of inventory at the end of their third quarter, with average sales of $1.7 million per day for that period, they would have about 59 days of sales in inventory ($100mm divided by $1.7mm = 58.8).
Monitoring this number is helpful, because auto sales have been known to go through peaks and troughs. The industry has historically seen flush times when optimism reigns and beneficial economic conditions boost sales. But these good times have occasionally been followed by downturns, characterized by weak demand and vehicle oversupply. Excessively high auto dealer inventory levels, fueled by excessive optimism about future demand, often portend a coming sales drop. But if industry negativity pushes inventory figures below historic norms, a sales rebound could be in the offing.
Though it’s not irrefutable evidence of an upcoming change in sales momentum, the days of sales in inventory calculation has been a useful tool in helping to forecast market conditions.
Data from four major auto dealers
In keeping an eye on the auto sector, I usually track inventory on four major auto dealers:
AutoNation, Inc. (NYSE:AN) owns and operates 267 new vehicle franchises, which sell 33 new vehicle brands across 15 states. It is America’s largest automotive retailer and a component of the S&P 500 Index. AutoNation, Inc. (NYSE:AN) had 2012 sales of around $16 billion.
Penske Automotive Group, Inc. (NYSE:PAG) operates 323 retail automotive franchises, representing 39 different brands, and 30 collision repair centers. It has 171 franchises in the U.S. and 152 franchises located overseas, primarily in the United Kingdom. Penske Automotive Group, Inc. (NYSE:PAG) is a member of the Fortune 500 and Russell 2000 with over $13 billion in sales last year.