June U.S. Auto Demand Below 17M Units SAAR: Revising Down 2017 Expectations

Consumer Discretionary / Industrials

Henry Kwon

Thematic (Sector/Industry)

United states Automobiles / Thematic (Sector/Industry)

<p>July SAAR edged up sequentially to 16.7m units from 16.5m units in June despite a 4% volume drop owing largely to one less selling day in July 2017 versus a year ago.  On YoY basis, however, July SAAR was down 3.5%.  YTD average SAAR stands at 17.3m units vs. 17.5m units in Jan-July 2016 (-1.5%).  Here is my initial take:</p><ul><li><div class="content-highlight">The Car-truck mix stood at 37-63% in July, consistent with the shift in consumer preference towards light trucks seen since 2013.  <strong>D3 OEMs pointed to rising transaction prices as a result of the mix shift but incentives are rising at an even faster rate.  This can be a potential a headwind for OEM margins.</strong></div></li><li><div class="content-highlight">OEMs are looking at a stronger 2H based on their July discussions.  In the U.S. it is generally understood that summer months represent stability following Memorial Day peak,to witness model closeouts and Labor Day related selling strength in August and September, so if this scenario plays out short term optimism may be restored.</div></li><li><div class="content-highlight"><strong>Production continues to come down (through June production data) in an effort to offset rising inventory and limit incentives.</strong>  </div></li><li><div class="content-highlight"><strong>When OEMs cut production to limit inventory buildup and incentive spend, the underlying strength of demand must be questioned.</strong>  Our four factor industry model has been pointing downwards on the direction of U.S. light vehicle demand and this should be fairly consensus (see <a href="https://www.smartkarma.com/insights/june-u-s-auto-demand-below-17m-units-saar-revising-down-2017-expectations" target="_blank" data-smartkarma-citation="insights:11876">June U.S. Auto Demand Below 17M Units SAAR: Revising Down 2017 Expectations</a>).  It is just a matter of whether the impending demand downturn turns into a slow multi-year process or a sudden drop.  </div></li><li><div class="content-highlight">In terms of picking winners and losers, it seems pretty clear at this point in the current fundamental context, investors are forced to pick OEMs who can display the best defensive posture in a deteriorating environment that negatively affects everyone.</div></li></ul>

July SAAR edged up sequentially to 16.7m units from 16.5m units in June despite a 4% volume drop owing largely to one less selling day in July 2017 versus a year ago.  On YoY basis, however, July SAAR was down 3.5%.  YTD average SAAR stands at 17.3m units vs. 17.5m units in Jan-July 2016 (-1.5%).  Here is my initial take:The Car-truck mix stood at 37-63% in July, consistent with the shift in consumer preference towards light trucks seen since 2013.  D3 OEMs pointed to rising transaction prices as a result of the mix shift but incentives are rising at an even faster rate.  This can be a potential a headwind for OEM margins.OEMs are looking at a stronger 2H based on their July discussions.  In the U.S. it is generally understood that summer months represent stability following Memorial Day peak,to witness model closeouts and Labor Day related selling strength in August and September, so if this scenario plays out short term optimism may be restored.Production continues to come down (through June production data) in an effort to offset rising inventory and limit incentives.  When OEMs cut production to limit inventory buildup and incentive spend, the underlying strength of demand must be questioned.  Our four factor industry model has been pointing downwards on the direction of U.S. light vehicle demand and this should be fairly consensus (see June U.S. Auto Demand Below 17M Units SAAR: Revising Down 2017 Expectations).  It is just a matter of whether the impending demand downturn turns into a slow multi-year process or a sudden drop.  In terms of picking winners and losers, it seems pretty clear at this point in the current fundamental context, investors are forced to pick OEMs who can display the best defensive posture in a deteriorating environment that negatively affects everyone.

U.S. July Auto Demand: SAAR and Incentives Up, Production Down