- U.S. auto sales slowed down in February: light truck sales
registered a growth of 7.8% while the car sales remained
- Strong truck sales bode well for the profitability of
the Detroit Three since they dominate the pickup segment
- In the long term, the automotive industry's growth rate
will slow as the market size nears the pre-recession
A closer look at February's monthly sales reveals that the
American auto companies like General Motors (
) stand to benefit if the current trend of strong truck sales were
to continue. While the overall growth might have slowed down to 4%,
light truck sales were up 7.8%. Car sales were flat,
suggesting that they might be nearing their
peak. Post-recession, light truck sales were battered due to a
plunging housing market. Now, with construction activity
recovering, their sales are witnessing a boost.
Strong truck sales bode well for the profitability of the
American auto companies since they dominate the pickup segment. Not
only does that mean that the Detroit Three could steal a larger
chunk of the incremental sales, but the more profitable light truck
category could boost their margins as well. Going forward, you
could very well see the overall automotive market driven by the
light truck segment (i.e. SUVs and pickups). A 100 basis point
expansion in GM's gross margins translates to about 15% gain in the
stock price, as per our estimates.
GM's Silverado sales surged 29%, while Ford's F-150 sales were
up 15%. With GM introducing newer versions of Silverados in the
summer, the company could command higher pricing for the vehicle,
which will help profitability.
See full analysis for General Motors
Growth Likely To Cool Off
February's monthly sales translated to about 15.4 million units
on an annual basis, which is still lower than the peak of 17
million back in 2005. The last couple of years have been
strong for the automotive industry, although the growth has come on
top of a low base. Now with the total market size reaching close to
the pre-recession levels, the rate of expansion will likely slow in
the coming years.
Historically, the total number of vehicles on the U.S. roads has
shown a strong correlation with the total number of houses. It has
typically stayed in a range of
vehicles per household. The historical average growth rate for the
number of households has been more or less equal to adult
population growth (~1.2% annually). Therefore, you can
expect the total number of vehicles in the U.S. to rise by a
similar rate in the long term.
We have a $28 price estimate for General Motors, which is
slightly ahead of the current market price.
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