Back to Main

Black Friday Lifts U.S. Auto Sales In November But Market Could Hit Plateau

By: Trefis
Posted: 12/23/2013 1:13:00 PM
Referenced Stocks: F;GM;HMC;TM;TSLA

It has been a very strong year for the U.S. auto industry. Sales are up 8.4% through the eleven months of the year. In November, the total automotive sales in the U.S. jumped 8.9% to 1.25 million units, helped by heavy promotions on Black Friday. General Motors ( GM ) was the only major automaker that posted double-digit growth rates in both the car as well as the light truck category. Overall, sales were up 13.7% for GM on a year-over-year basis.

A slew of model refreshments is helping GM round off what has been an excellent year for the automaker. The revamped versions of Silverado, Malibu, Cruze are striking the right chords with the public. In addition, the Cadillac brand continues to do very well with sales up 11.4% in November. Cadillac's sales could maintain the momentum with the launch of the new Escalade and the ELR in 2014.

We have a $40 price estimate for General Motors , which is slightly above the current market price.

Due to increased competition from GM, Ford's car sales might be beginning to feel the pinch as they could only rise 6%. Chrysler is facing a similar situation with car sales down 7.1% during the same period. Both these automakers continue to do well in the light truck segment though. Note that the light truck category contains SUVs, pickups and crossovers.

Among the Japanese automakers, Toyota's performance stood out with a 10.1% rise in unit sales on a year-over-year basis. Sales of Toyota's Camry, which have largely remained stagnant this year, rose 5.6% to 30,386 units.

Demand Could Soon Plateau

Even though it has been a stellar year for the automotive industry, growth is expected to slow down as the market size reaches close to the pre-recession levels. Auto demand peaked in 2006 when sales touched 16.5 million units. However, sales had crashed to 10 million units by 2009, as more people deferred buying new vehicles due to high unemployment rates and an uncertain future. In fact, at the end of 2012, the average age of a light vehicles in the U.S. had risen to an all time high of 11.4 years. The corresponding figure stood at 9.9 years in 2006.

However, with unemployment rate now below 7.5%, there is more economic activity which is resulting in higher auto sales. Thus, the surge in auto sales witnessed in the last 2-3 years is primarily due to a pent up demand.

The 11-month data for 2013 suggests that the annual sales should touch 15.5 million units, which is not very far off from 2006′s figure. As a result, sales in the upcoming year should naturally slow down. Moreover, with the Fed announcing its decision reduce the stimulus, there could be a further rise in the Treasury rates. The 10-year bond yields are already up 70 to 80 basis points since the start of the year. Higher Treasury rates will tend to push up the auto loan rates as well, which could deter some of the potential buyers and consequently lower the overall vehicle demand.

The rate of expansion of the U.S. auto market is already down for the third year in the running. In 2013, auto sales have been buoyed by strong truck sales which are up 11.8%, compared to 5.9% gain for cars. Stable fuel prices combined with a rebounding housing market have resulted in a strong demand for SUVs and pickup trucks. Pickup trucks are used extensively in construction market and a strong housing market bodes well for their sales. The number of housing starts, or the houses on which construction has started, jumped 22.7% in November. But any slowdown in the housing market (due to higher mortgage rates as a result of higher bond yields) can adversely affect the light truck category as well.

Signs To Watch Out

There is already some suggestion that desperation might be starting to creep in among the lenders. The percentage of non-prime, subprime, and deep subprime borrowers rose to 26.04% in the third quarter of 2013, from 24.84% in the third quarter of 2012. A higher percentage of subprime/deep subprime borrowers suggests that automakers and financing companies are having a hard time meeting their sales targets through loans to prime borrowers (or the more credit worthy borrowers) and are having to resort to less credit worthy borrowers.

This is reminiscent of the lending practices prevalent in the housing market before the 2008 crash. Lenders had recklessly doled out loans to subprime borrowers which eventually led to a bubble in the housing market.

The inventory levels have also begun to rise, suggesting that automakers are not able to sell vehicles at the rate at which they are producing them. The inventory level for the Detroit Three stood close to 90 days in November. Ideally, it should be somewhere between 60 to 80 days. Ford has already announced that it will trim its U.S. production by 2% in the first quarter of 2014. Others might have to follow suit or offer added incentives to clear the stockpile of the existing vehicles.

See full analysis for General Motors

Understand How a Company's Products Impact its Stock Price at Trefis