US Autos: Looking Back on 2018 and Musing on 2019

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

<p>March SAAR came in at 17.45m units, beating consensus expectations of high 16m unit range.  Our expectations were in line with consensus expectations so in seasonally adjusted terms March headline figures came in better than what we were expecting.  However, looking deeper into the details could unearth lingering potential headwinds in our view.  Here are our initial takes on the March figures:</p><ol>
<li>1Q average SAAR of 16.91m units represents a 1.5% YoY decline from the 1Q18 average of 17.16m units, so while sequential selling rate improvement in March seems positive, we would need to see continued sequential improvements in 2Q to become more upbeat.</li>
<li>Perhaps more importantly, JD Powers estimates the likely retail mix at 76.5% in March based on figures for the first 14 selling days of the month, which would suggest that retail selling rate was weaker than in March 2018, while fleet selling rate strengthened on a YoY basis.  It should be kept in mind, however, that fleet volumes are stronger in 1H than in 2H based on the order-delivery cycle in the auto industry, meaning that retail strength would be key in 2H19 in maintaining industry selling rate strength at current levels.</li>
<li>While incentives have come down on YoY basis, days supply especially for light trucks remains on a sharp uptrend, a pattern we have been noting since 2H18.  OEMs have pointed to incentive discipline as a positive, but we question how long incentive discipline can be maintained against rising inventory especially for light trucks, since incentives tend to follow inventory trends.  </li>
<li>D3 brands gained volumes sequentially in March but lost volumes on YoY basis.  1Q19 sales of D3 brands also posted YoY declines.  This pattern was also noticeable at Toyota and Honda.</li>
<li>Clear market share gainers amongst Asian brands in March were Honda (+29.0% MoM, +4.3% YoY), Hyundai (+32.9% MoM, 1.8% YoY), Kia (+28.6% MoM, +10.2% YoY), Mitsubishi (+42.4% MoM, +36.9% YoY) and Subaru (+25.5% MoM, +6.0% YoY).  1Q19 sales of these brands also posted YoY gains, versus a-2.5% YoY decline in 1Q19 industry sales.</li>
</ol><p>In <a href="https://www.smartkarma.com/insights/us-autos-looking-back-on-2018-and-musing-on-2019" target="_blank" data-smartkarma-citation="insights:27115">US Autos: Looking Back on 2018 and Musing on 2019</a> back in January, we published our 16.7m unit SAAR expectations in 2019 based on the assumptions that property price and interest rates are likely to represent potential headwinds against light vehicle demand growth in 2019.  While we believe current SAAR range does not deviate too much from our expectations formed at the the beginning of the year, one potential factor that can potentially change our opinion in the coming months is a growing expectation in the financial markets that the Fed may actually cut interest rates in 2H19.  As of now, however, we have not factored a rate cut into our model and maintain our 16.7m unit SAAR expectations for 2019.</p><p>From an equity market perspective we believe D3's strategy to abandon the car segment has a potential to backfire over the next few years, even though at this point the risks may not appear to be pronounced.  We would continue to monitor inventory trends especially in the light truck segment in the coming quarters.</p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/083/928/original/Screen%20Shot%202019-04-02%20at%208.52.09%20PM.png?1554263562" class="editor-image img-responsive" data-smartkarma-image-id="83928"></figure><div class="content-caption">Source: Autodata</div>

March SAAR came in at 17.45m units, beating consensus expectations of high 16m unit range.  Our expectations were in line with consensus expectations so in seasonally adjusted terms March headline figures came in better than what we were expecting.  However, looking deeper into the details could unearth lingering potential headwinds in our view.  Here are our initial takes on the March figures:
1Q average SAAR of 16.91m units represents a 1.5% YoY decline from the 1Q18 average of 17.16m units, so while sequential selling rate improvement in March seems positive, we would need to see continued sequential improvements in 2Q to become more upbeat.
Perhaps more importantly, JD Powers estimates the likely retail mix at 76.5% in March based on figures for the first 14 selling days of the month, which would suggest that retail selling rate was weaker than in March 2018, while fleet selling rate strengthened on a YoY basis.  It should be kept in mind, however, that fleet volumes are stronger in 1H than in 2H based on the order-delivery cycle in the auto industry, meaning that retail strength would be key in 2H19 in maintaining industry selling rate strength at current levels.
While incentives have come down on YoY basis, days supply especially for light trucks remains on a sharp uptrend, a pattern we have been noting since 2H18.  OEMs have pointed to incentive discipline as a positive, but we question how long incentive discipline can be maintained against rising inventory especially for light trucks, since incentives tend to follow inventory trends.  
D3 brands gained volumes sequentially in March but lost volumes on YoY basis.  1Q19 sales of D3 brands also posted YoY declines.  This pattern was also noticeable at Toyota and Honda.
Clear market share gainers amongst Asian brands in March were Honda (+29.0% MoM, +4.3% YoY), Hyundai (+32.9% MoM, 1.8% YoY), Kia (+28.6% MoM, +10.2% YoY), Mitsubishi (+42.4% MoM, +36.9% YoY) and Subaru (+25.5% MoM, +6.0% YoY).  1Q19 sales of these brands also posted YoY gains, versus a-2.5% YoY decline in 1Q19 industry sales.
In US Autos: Looking Back on 2018 and Musing on 2019 back in January, we published our 16.7m unit SAAR expectations in 2019 based on the assumptions that property price and interest rates are likely to represent potential headwinds against light vehicle demand growth in 2019.  While we believe current SAAR range does not deviate too much from our expectations formed at the the beginning of the year, one potential factor that can potentially change our opinion in the coming months is a growing expectation in the financial markets that the Fed may actually cut interest rates in 2H19.  As of now, however, we have not factored a rate cut into our model and maintain our 16.7m unit SAAR expectations for 2019.From an equity market perspective we believe D3's strategy to abandon the car segment has a potential to backfire over the next few years, even though at this point the risks may not appear to be pronounced.  We would continue to monitor inventory trends especially in the light truck segment in the coming quarters.Source: Autodata

March U.S. Auto Sales: SAAR Strength Beats Expectations - But Is It Fleet Effect?