How good are auto sales?
Earlier this month, General Motors (
) released March sales growth of 4.1%, positively surprising the
much lower consensus 0.8% increase. These are excellent sales
numbers and suggest a much improved business (just in time for
their Congressional hearings on vehicle safety and millions of
But it's not just GM that is having a great month; the entire
industry is doing well as Ford (
) also released its sales growth of 3% for the month. It was
the strongest March that Ford has seen in eight years, and auto
stocks (NYSEARCA:CARZ) across the board rallied on the news.
But is this a buying opportunity?
Underneath the Hood
What wasn't discussed in the mainstream media was the fact that
GM's inventory is also rising at a staggering 15% rate over last
year, reaching an all time high of cars for sale at dealer lots (
Why is this important?
In the chart above I show the inventory to sales ratio.
Since 2011, this ratio has crept higher, recently surpassing
a key threshold that has marked previous slowdowns of auto sales.
Given the latest data released by Ford, GM, and the other
dealer based auto companies (
), this disturbing trend is getting even more extreme as the plot
continues toward territory reserved for the 2008 financial
The only major auto company that doesn't use dealers is the
newcomer Tesla (NASDAQGS:TSLA), making its sales numbers
likely much more "real" and less accounting gimmicky than the
traditional car companies that are likely channel stuffing their
dealers with vehicles they don't need. That liklihood
stuffing is what the inventory/sales ratio shows, with more cars
being left in inventory than are actually being sold as inventory
rises much faster than sales.
The chart shows why the sales numbers from the auto companies
should be taken with a grain of salt, as all they are doing is
pushing vehicles onto dealers lots; sales for the big car
companies, but excess inventories for the dealers selling to the
In other words, the car companies continue to "sale" to the
dealers, but the consumer (NYSEARCA:XLY) is slowing down its
purchases from dealer lots, and the more extreme the inventory to
sales ratio gets, the more likely a sizable pullback in auto sales
is around the corner as lots become even more full and dealers must
reach farther for sales utilizing riskier and riskier tactics.
As USA Today reported in late 2013, consumers are having to push
their car loans the farthest in term duration in history (and
dealers are willing to provide) just to get into the vehicles that
are sold. The number of car loans sold with 73-84 month terms
(6-7 years) made up 20% of all new car loans in 2o13. Loans
this long in duration were essentially non-existent just five years
ago. Today, loans longer than the historically normal 60
month duration now make up over 60% of all car loans.
Not only are sales not keeping up with inventory, but the sales
that are getting done are with more and more unfavorable consumer
terms as dealers are having to reach farther and farther for
consumers to afford the vehicles.
For more information on the rising inventory to sales ratio
check out the more detailed article I did on the topic, entitled, "
Are rising inventories good
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