Expectations
The Street expects May US light vehicles on a seasonally adjusted annual rate, or SAAR, to track at roughly 15.2 million, which will mean a year-over-year increase of 9%. 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.
Major players and the general trend
General Motors Company (NYSE:GM) is expected to witness a 6% rise in sales on a year-over-year basis. The other listed Detroit player, Ford Motor Company (NYSE:F) is expected to achieve a stronger double-digit growth rate of 11% for the year. Chrysler is expected to see a 9% rise in its sales.
This month’s auto review is a reminder that the North American auto industry remains healthy, with the SAAR steadily rising, incentives in check, inventories historically low, and commodity prices, such as those used in care production – synthetic rubber, copper, and polypropylene, falling.
The channel checks in May indicate another strong full-size pickup truck month (April was also strong), which strongly suggests increased volume for the Detroit 3. It is interesting to note that General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F) & Chrysler control ~93% of this market. This trend was reinforced by Ford’s recent announcement of increased F-Series capacity.
While the North American auto industry is healthy, we are not seeing substantial evidence just yet of a turnaround in Europe despite the perception many investors are beginning to position themselves for a Europe turnaround. While Western Europe’s (WE) SAAR has stabilized sequentially in recent months, it should also be noted that WE SAAR tracked -8% in April and remains -8% on a year-to-date basis.
Investment thesis
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 cheap 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 15 months to turn the whole portfolio over.
Similarly, I am bullish on Ford Motor Company (NYSE:F) as well. The company’s future looks bright in reagrds to its small car sales in the near future, in particular. It is obvious that small fuel-efficient cars are demanded in higher numbers in recessionary times. According to Ford, its small car sales soared 29% in 2012. The new C-Max hybrid is a big success. Also, Ford Motor Company (NYSE:F)’s F-series truck was declared as the most sold light vehicle in the US with an astounding sales figure of 645,316 units in 2012.
Overall, the stock is a cheap buy given its forward multiple of 8. In fact, Goldman Sachs sees it as a must buy and places it on its conviction list due to the stock being cheap and the company actively working to restructure its European operations under the One Ford Motor Company (NYSE:F) strategy.
Japanese companies – A disappointing story?
The continuously weakening yen has hardly helped the Japanese OEMs to improve their market share in the US auto industry. However, the recent decline in market share for Toyota Motor Corporation (ADR) (NYSE:TM) can be attributed to the sharp cuts in its incentives. However, the positive out of this is that the company is expected to experience an improved average selling price given that it has taken its foot off the promotional pedal.
Recently, Toyota Motor Corporation (ADR) (NYSE:TM) reported its largest annual profit in five years. Now the company expects its net income to jump 42% through 2014, which shows its phenomenal growth rate. And hence shows that the company’s declining market share in US doesn’t mean that the company is not performing well in the world.
Things are also getting better in China, where Japanese automakers faced serious hostility from Chinese consumer base, earlier this year, after the Senkaku-Diaoyu island rift intensified between the two nations. New data shows 16,000 cars were shipped from Japan to China in April – three time what was exported last October. Japanese brands now account for 16% of the market after dipping to as low as 7%.
Final word
Many are betting that May will come in as a strong month for auto sales after three back-to-back sequential declines in the US SAAR. I am bullish on all of three of them. General Motors Company (NYSE:GM)’s cheap valuation and upcoming truck launch, Ford Motor Company (NYSE:F)’s success in small cars and Toyota Motor Corporation (ADR) (NYSE:TM)’s improving global end markets give me enough reason to be so.
The article Fingers Crossed for May Auto Sales originally appeared on Fool.com.
Zain is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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