Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

From February's SAAR of 16.57m units, March SAAR had jumped to 17.45m units before settling down to 16.4m units in April (-6.0% MoM, -4.3% YoY).  Our initial impression is that April saw a normalizing selling rate pattern against a challenging macro backdrop:<ul>
<li>The selling rate strength in March most likely reflected pent up demand from the January-February SAAR weakness stemming from the cold weather so is likely to be a one-off.  YTD observations of the industry retail-fleet mix strongly suggest that SAAR weakness in 2019 is being driven largely by retail weakness.
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<li>A steep drop in smaller vehicle sales is leading to rising transaction prices from the resulting industry mix shift.  The weakening SAAR is most likely stemming from reduced incentive spending by OEMs and higher borrowing costs compared with last year, as younger and weaker credit buyers are squeezed out of the market.  In other words there is no clear indication that OEM pricing power is improving.
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<li>Light truck days supply remains higher than car days supply.  Overall inventory remains at elevated levels, suggesting investors should look for either a) further production cuts and/or b) rising incentives in 2H19.
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Market share dynamics have been favoring Honda, Hyundai-Kia, Mitsubishi and Subaru YTD amongst Asian brandswhile Tesla has been the only US brand that has made significant volume growth on YoY basis.  Ford's light truck sales has been the only bright spot for D3 on the same scale. </li>
</ul>We have been observing that of the 3 macro factors we monitor in formulating our SAAR outlook, income effect is likely to be the sole tailwind for light vehicle demand in 2019 at this point.  While recent stabilization seen in pending home sales and housing prices may alleviate some downward pressure on demand, wealth effect in 2019 at best seems neutral at this point, as opposed to providing strong tailwinds as in the past.  Interest rates currently are not providing tailwinds to the average car buyer, either, given higher monthly payments (or longer term to maturity) that a new car purchase would mean compared with 2016.  Given challenging market conditions, we would continue to look for brands' ability to gain share at the expense of others as a key valuation driver in the stock market.

From February's SAAR of 16.57m units, March SAAR had jumped to 17.45m units before settling down to 16.4m units in April (-6.0% MoM, -4.3% YoY).  Our initial impression is that April saw a normalizing selling rate pattern against a challenging macro backdrop:
The selling rate strength in March most likely reflected pent up demand from the January-February SAAR weakness stemming from the cold weather so is likely to be a one-off.  YTD observations of the industry retail-fleet mix strongly suggest that SAAR weakness in 2019 is being driven largely by retail weakness.

A steep drop in smaller vehicle sales is leading to rising transaction prices from the resulting industry mix shift.  The weakening SAAR is most likely stemming from reduced incentive spending by OEMs and higher borrowing costs compared with last year, as younger and weaker credit buyers are squeezed out of the market.  In other words there is no clear indication that OEM pricing power is improving.

Light truck days supply remains higher than car days supply.  Overall inventory remains at elevated levels, suggesting investors should look for either a) further production cuts and/or b) rising incentives in 2H19.


Market share dynamics have been favoring Honda, Hyundai-Kia, Mitsubishi and Subaru YTD amongst Asian brandswhile Tesla has been the only US brand that has made significant volume growth on YoY basis.  Ford's light truck sales has been the only bright spot for D3 on the same scale. 
We have been observing that of the 3 macro factors we monitor in formulating our SAAR outlook, income effect is likely to be the sole tailwind for light vehicle demand in 2019 at this point.  While recent stabilization seen in pending home sales and housing prices may alleviate some downward pressure on demand, wealth effect in 2019 at best seems neutral at this point, as opposed to providing strong tailwinds as in the past.  Interest rates currently are not providing tailwinds to the average car buyer, either, given higher monthly payments (or longer term to maturity) that a new car purchase would mean compared with 2016.  Given challenging market conditions, we would continue to look for brands' ability to gain share at the expense of others as a key valuation driver in the stock market.  

April U.S. Auto Demand: 16.4m Unit SAAR Suggests Strong SAAR in March May Have Been a One-Off