Autos' February Sales Sag On Weak Demand & Thin Discount

Despite the otherwise smooth-sail for the broader economy, the month of February was not kind to the auto sector. Most of the auto companies saw their sales sagging during the month.

A reversal of the automakers’ stance of offering more discounts to entice buyers, rise in interest rate and stringent credit conditions tamed consumer demand and led to the the consequent decline in sales.

Sagging Sales

Per Autodata Corp., in February 2018, the seasonally adjusted annualized rate (SAAR) of U.S. car and light truck sales declined to 17.08 million units from 17.45 million in February 2017. Among the auto biggies, both General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) reported a 6.9% decline in U.S. sales.

Among the other automakers, sales of Fiat Chrysler Automobiles N.V. (NYSE:F) , Honda Motor Company, Ltd. (NYSE:HMC) and Nissan Motor Co. (OTC:NSANY) declined 1.4%, 5% and 4%, respectively. The only exception was Toyota Motor Corporation (NYSE:TM) , which witnessed a 4.5% rise in sales.

Lower sales witnessed by many automakers was a result of softening demand for vehicles by consumers following a lengthy boom phase. In fact, during the month, strong sales of sports utility vehicles (SUVs) and crossovers could not match the slide in pickup truck sales and resulted in the decline in overall sales.

Putting on the Brakes

In fact, the auto sector’s bull run, which started in the post-recession period, continued unabated till 2016. Thereafter, the brakes had to be pressed and in 2017, U.S. new vehicle sales declined 2% to 17.23 million. Industry consultant, LMC Automotive projects U.S. new vehicle sales to hit below 17 million units in 2018. The higher interest rates and increased competition of new vehicles with more late-model used cars can be attributed to this negative outlook.

Whatsoever, even in the recent past, consumers’ demand for vehicles received a tremendous boost from a flurry of discounts by automakers and availability of easy credit. According to an estimate by the industry consultant, J.D. Power, in February 2018, discounts on pickups and SUVs declined on average by $450 per unit in comparison to that of February 2017.

Also, off-lease used vehicles are flooding the market, making demand for new vehicles relatively less attractive. Moreover, a rise in interest rate by the Federal Reserve to levels not seen since 2013, has made auto loan pricier. Added to this, volatility in the equity market has turned consumers more panicky in making big purchases.

Meanwhile, President Trump announced that he will impose heavy tariffs on imported steel and aluminum. This is likely to increase the cost of auto production, aggravating its woes.

Temporary Brakes

Lowering down of discounts may somehow limit consumers’ demand for vehicles in the short run only. High discount is not justified in the economic sense as this can erode profits of automakers. Huge discounts can’t sustain for long. In fact, paring down of the discount is a positive development for the long-term growth of the industry.

Moreover, the auto industry is passing through an unprecedented transition phase, thanks of rapid absorption of electric and autonomous vehicles and changing consumers’ preference pattern. The recent bumps may only be temporary in nature as the sector is making the necessary adjustments to traverse the new path.

Currently, Fiat Chrysler and General Motors carry a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively. Other stocks Ford, Honda, Nissan and Toyota carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

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Ford Motor Company (F): Free Stock Analysis Report

General Motors Company (GM): Free Stock Analysis Report

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