October Auto Sales: Cautious on Most Players

After one of the most tumultuous months in the stock market, where 800 point-winning days were followed by 700 point-down days, it shouldn't come as a surprise that consumer confidence, similar to investors', has been shaken.

Despite the wild volatility in the stock market few could have expected the extent to which that weakness would be represented in monthly auto sales. Total light vehicle sales declined more than 31% to 838,156 units; year to date, 11.6 million vehicles have been sold. Of the 17 automakers that we model, only Audi saw a year over year increase. Even the once mighty Toyota Motors (TM) and Honda Motor Company (HMC) saw sales decline 23.0% and 25.2% year over year. This problem started at the beginning of the year with rising gasoline prices, and has begun to snowball despite a sharp drop in gas prices recently as the economy continues to worsen. General Motors (GM) offered its customers employee pricing during the month of September which accelerated sales for the month but thus caused a drop in October; however, through the end of the year, we are expecting to see incentive driven sales.

The federal government approved the $25 billion of inexpensive loans promised to the auto industry, but none of that money has since been doled out. Nevertheless, that help will not solve the problem of no one buying cars. Minus the last week of October, the Dow Jones Industrial Average and S&P 500 were on track for the worst month on record. Similarly, total auto sales for the month of October, adjusted for the increase in the U.S. population, were "the worst month in the post-World War II era," said Michael DiGiovanni, GM's top sales analyst.

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In previous months, it had been the truck sales that acted as an anchor on the monthly tallies, however, during October tightening credit standards and cautious (maybe even frightened) consumers were staying out of the showrooms altogether. GM's credit arm, GMAC (GM owns 49% and Cerberus owns 51%) continued to tighten credit standards during the month, making loans available only to customers with excellent credit scores. It is estimated that two out of every three people that walk into a General Motors showroom would not qualify for the heightened standards. Additionally, GM is not the only the auto maker tightening standards. Despite running the 0% APR campaign, Toyota has tightened its standards, but is still trying to grab a larger market share in a shrinking market.

The credit crunch is taking a toll on just about every industry in the United States and the signs are being seen worldwide. Auto sales in China, India, and Russia, once thought to be immune to the economic contagion that has afflicted the United States, began to falter over the past few months. Now, all around the world central banks and governments are considering lowering interest rates and even issuing stimulus packages to support growth. During 2008 so far, the industry has taken huge losses in North America in an attempt to overhaul its operating structure to make it more profitable and better able to compete with foreign manufacturers, which has been fueled and funded by strength outside of the United States. However, now that the world economy is showing signs of slowing, that cash flow is looking more and more suspect. The industry could be in perfect shape, but it wouldn't matter right now because few people are looking to purchase a new car.

Being strapped for cash has forced General Motors to seek out a suitor, but all the news about the combination of General Motors and Chrysler seems like an extremely horrible idea in our opinion. Both companies are struggling and burning through cash at alarming rates. What benefits would the combined companies have, we find ourselves asking. Both companies need to be getting smaller and more nimble, not going in the opposite direction. The combination is fueled by the need for cash to fuel the restructuring activities, but this merger would only put General Motors even further behind the eight ball.

However, down the line, despite our feelings against the merger, the combined company could see some synergies from combining. General Motors would be able to cease production of minivans as Chrysler has a large share of that niche market. Additionally, various Chrysler brands could be absorbed by the Pontiac brand, beefing up its "muscle car" or performance image. Finally, the combination of the Chevy Silverado and the Dodge Ram would make a nice one-two punch in the attempt to dethrone Ford's F-150 as the best selling truck.

Despite these potential positives, we do not feel either Chrysler or General Motors would benefit from this deal in the next three years and it would only force the entire industry closer to needing a government bailout. While I am a big proponent of free markets and letting capitalism work, we have seen that there are some companies that are too big to fail. General Motors and Ford are examples of those types of companies. If either were to fail it wouldn't cause a domino effect in the financial world, but it would cause massive job losses in the United States and the economy to falter even further. We remain cautious on most players in the space, including SELL recommendations on Ford (F) and Toyota Motors (TM), while we have reiterated our HOLD recommendation on General Motors (GM).

Source: seekingalpha.com