Auto sales disappoint again

From Justin Brill, Editor, Stansberry Digest:

The bad news for autos continues…

The latest data show U.S. auto sales plunged again in June. As industry-data firm WardsAuto reported last week…

U.S. light-vehicle sales weakened more than expected in June…

June’s seasonally adjusted annual rate [“SAAR”] of 16.4 million units was the lowest since the same total in October 2014, and well below year-ago’s 16.8 million. It also marked the sixth straight year-over-year decline.

The year-to-date SAAR through June was 16.8 million units, 2% below year-ago’s 17.1 million and a 3-year low for the period… Despite big production cuts expected in the latter half of 2017, the industry will need relief on the retail side if it is to get bloated dealer stocks in line with demand this year.

Worse, the decline isn’t only being fueled by a slowdown in retail sales. It’s also being driven by an intentional pullback in sales to rental-car companies. As the Wall Street Journal reports…

While retail demand is losing steam, each of Detroit’s players also reported significant reductions in deliveries to daily-rental companies, long the Motor City’s biggest customers.

Sales to Enterprise Rent-A-Car or Hertz Global Holdings traditionally were a way for auto makers to keep factories rolling even as dealership traffic slowed. But an excess of that business has dented profits, auto makers say…

The fleet-sales pullback is having a disproportionate impact on wider volumes. Sales to retail customers at dealerships are down less than 1% over the first six months of the year, but sales to nonretail customers such as government fleets, commercial buyers and rental-car companies are off 7.8%, according to J.D. Power.

Why would automakers intentionally walk away from a huge source of new-car demand? Stansberry’s Investment Advisory subscribers already know the answer. As Porter and his team explained in the October 2016 issue…

The rental-car industry is a model of capital inefficiency. This industry requires massive cash outlays every year to continually replace its aging fleet of cars. After all, customers don’t want to drive a five-year-old, beaten-up Ford Focus…

These companies spend billions of dollars each year replacing their older used cars… They partially pay for these massive ongoing purchases by selling their older used-car fleet.

Most of their used-car sales happen in open market auctions… Rental-car companies also sell their used cars back to auto manufacturers. The carmakers agree to buy them back at set prices a few years after the initial new car sales. Rental-car companies call these “program” cars. Today, about 45% of their cars are program cars. Generally, they sell all fleet vehicles within three years.

In short, it appears automakers are stepping away from low-margin fleet sales in a desperate attempt to boost falling profits. Unfortunately, that means giving up one of the biggest sources of new-car demand, while inventories sit at record highs and retail sales are rolling over.

It’s truly a no-win situation. Expect more pain ahead for automakers.

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