4 Takeaways From June Auto Sales

by Susan J. Aluise | July 5, 2012 10:50 am

4 Takeaways From June Auto Sales

Stronger-than-expected monthly U.S. vehicle sales for June[1] — the best June since pre-recession 2007 — gave automakers another reason to celebrate Independence Day. Still, despite posting overall sales that beat analysts’ estimates, investors have reason to be cautious about auto stocks later this year.

First, the good news: After posting a sluggish May, automakers sold 1.27 million vehicles in June — 22% higher than in June 2011 and an annualized sales rate of 14.1 million. Analysts had predicted a rate of 13.9 million.

The Detroit Three – General Motors (NYSE:GM[2]), Ford (NYSE:F[3]) and Fiat’s (PINK:FIATY[4]) Chrysler unit all posted better-than-forecast sales last month.

GM’s rose nearly 16% — more than double analysts’ estimate of 7.6%. GM gained across all four of its major brands: Chevrolet, Buick, GMC and Cadillac. The company held on to its first-place ranking in the U.S. with a market share of 19.3% and total sales of 248,750. Small to midsize cars led GM’s gains, particularly the Buick LaCrosse and the Chevrolet Malibu. The Chevy Silverado pickup also posted a strong showing.

However, Chevrolet Cruze compact sedan sales fell nearly 24% year-over-year. GM recently announced plans to recall nearly half a million[5] of the popular model over an engine problem that potentially could cause fires.

Ford sales rose by 7.1% in June, beating analysts’ expectations of 3.7%. Ford ended the month in second place in the U.S. with a market share of 16.1% and total sales of 207,204. June turned out to be Ford’s best sales month since September 2007.

But when auto buyers chose Ford, many bought large. Despite best-ever sales of its Ford Fusion sedan, strong growth in Ford’s Escape and Explorer SUVs and the ever-popular F-Series pickups buoyed June sales. Although Ford has done a lot to boost fuel efficiency in larger vehicles, it could be vulnerable if –  or when — gas prices rise again.

Chrysler sales soared again in June, up more than 20% over 2011 and its best June in five years. The rebounding carmaker had an 11.3% U.S. market share, with June sales totaling 144,811. Chrysler did well in both car and light-truck sales: The Chrysler 300 full-size sedan, Dodge Avenger and Fiat 500 all posted strong growth, as did the Dodge Ram pickup and Jeep Wrangler. Jeep Liberty sales rose a whopping 50%.

June also was a big comeback month for Toyota (NYSE:TM[6]) and Honda (NYSE:HMC[7]). TM sold 177,795 vehicles in June — 60% more than its post-earthquake and tsunami sales last year. HMC sales rose 49% to 124,808. Analysts were disappointed in the results however: They had expected gains of 66% and 51%, respectively, for the two Japanese automakers.

Sales of Toyota’s Camry and Corolla/Matrix cars jumped dramatically, as did the RAV4 pickup. Sales of the Prius, production of which was particularly affected by last year’s earthquake, tsunami and nuclear disaster in Japan, rose more than 340%. Toyota’s luxury Lexus brand soared more than 85%.

The Accord led Honda’s gains, up more than 84% over June 2011. Sales of the Civic compact and CR-V crossover and Odyssey minivan also grew by more than 50%. The automaker’s biggest loser was the hybrid Insight, whose sales slid more than 51%.

So, most important: What do all these numbers mean for investors? Here are four takeaways from June vehicle sales:

The Bounce From Incentives, Credit — And Cheaper Gas

June sales were boosted by a combination of factors. Early July 4th incentives generated a sales spike in the month’s last 10 days, and gas prices have fallen from nearly $4 a gallon in April to an average of $3.35 this week. Add to that lower interest rates and looser credit, which are making it easier for car buyers[8] with lower credit scores to bring home a new car. Any change in those three dynamics could have a chilling impact on sales for the rest of the year.

Car Sales Rise May Not Accurately Reflect the Economy

Vehicle sales are the one bright spot in a U.S. economy that could still slip into recession. Manufacturing activity contracted for the first time since July 2009, falling 3.8% in June, according to the Institute for Supply Management[9] (ISM). And it gets worse: New factory orders fell 12.3% — their largest slip in 11 years. Exports also fell by 6%, suggesting that the U.S. economy is no longer growing, but contracting. While all the economic news isn’t all gloom and doom[10], the worries aren’t going away.

The “Fiscal Cliff” Looms Large

The U.S. economy will take a double-whammy hit on Jan. 1 if the Bush era tax cuts expire and the automatic federal government spending cuts kick in, as both are now scheduled to happen. An International Monetary Fund report[11] released Tuesday said the so-called “fiscal cliff” could pitch the U.S. into a downturn and wreak havoc on the global economy.

Watch Europe and China

Forget about rumors of progress on the eurozone crisis — Europe’s economies are still sinking hard. And the slowdown in China’s formerly white-hot economy further exacerbates the headwinds for automakers, which have made big investments in that economy. Less-than-expected sales in China will be felt from Detroit to Japan to Germany.

Bottom Line: Auto stocks have staged a comeback since the dog days of 2009. And the June sales data gave shares a bounce on Tuesday. GM rose more than 5%, FIATY gained more than 4% and F was up nearly 3%. But despite these gains, attractive price-to-earnings growth (PEG) ratios and forward P/Es under 6, there are good reasons these three stocks are trading near their 52-week lows — foremost among them the rising recession risk.

TM and HMC are on the comeback trail from last year’s natural disaster. But those stocks are also trading around 10 times earnings, which I think is too expensive now.

In my view, the record June sales aren’t enough to trump the risks in Europe and China. I’m also pessimistic that U.S. lawmakers will do anything about the country’s looming U.S. fiscal calamity in an election year. So, I can’t feel good about driving any auto stocks off the lot right now.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. U.S. vehicle sales for June: http://investorplace.com/2012/07/automakers-post-strong-sales-in-june/
  2. GM: http://studio-5.financialcontent.com/investplace/quote?Symbol=GM
  3. F: http://studio-5.financialcontent.com/investplace/quote?Symbol=F
  4. FIATY: http://studio-5.financialcontent.com/investplace/quote?Symbol=FIATY
  5. recall nearly half a million: http://www.usatoday.com/money/autos/story/2012-06-22/cruze-recalll/55763078/1
  6. TM: http://studio-5.financialcontent.com/investplace/quote?Symbol=TM
  7. HMC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HMC
  8. easier for car buyers: http://www.sacbee.com/2012/06/22/4582633/its-easier-than-ever-to-buy-a.html
  9. Institute for Supply Management: http://www.ism.ws/ISMReport/MfgROB.cfm
  10. economic news isn’t all gloom and doom: http://investorplace.com/2012/07/latest-econ-data-not-all-doom-and-gloom/
  11. International Monetary Fund report: http://www.washingtonpost.com/business/economy/us-economy-at-risk-imf-report-warns/2012/07/03/gJQAuundKW_story.html

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