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What Sagging Auto Sales Mean for Your Portfolio

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It seems the travails of the automobile industry aren't over yet, especially if May auto sales are anything to go by. While the first quarter saw the Big Three Detroit automakers posting positive quarterly profits for the first time in nearly seven years, boosting hopes of a quick rebound, May auto sales paint a very different picture.

The U.S. auto industry witnessed the lowest rate of sales in the past eight months, as sales fell 3.7% during the month of May. While one month's performance is not a trend, it could be an indicator of a slowly brewing reality setting in.

What slowed down sales?
As always, erratic gas prices are strong-arming the fundamental undercurrents within the industry.

While gas prices wreaked havoc at home, the earthquake and tsunami in Japan caused big tremors in the auto industry abroad, particularly in the manufacturing centers of some of the world's largest car and car parts companies. Owing to supply shortages and rising input prices, some companies were forced to raise prices of their vehicles in the middle of a challenging period, which is certainly not the optimal time to begin pressuring customers. Ford Motor (NYSE: F  ) raised prices by an average of 0.4% in May.

For its part, Japan recorded the worst auto sales for the month of May since 1968. Major manufacturers based in Japan faced big setbacks due to a shortage of ready vehicles as well as parts. Toyota Motor (NYSE: TM  ) suffered a 33.4% decline in total sales in May as compared to the same month last year, while Honda Motor's (NYSE: HMC  ) sales fell by 22.5%.

Along with price increases, companies also cut down on customer incentives. The light-vehicles average incentive was down by 28.9% from May 2010, according to data firm TrueCar. Toyota made the biggest incentive cuts -- a fall of 53.3% from last year. This affected consumer purchases habits, leading to lower sales.

So is it all downhill for the auto sector going ahead? Perhaps not. There are a few reasons to believe that slowing sales may not be permanent.

Small is big
Generally speaking, consumers are choosing smaller, fuel-efficient models these days, and, unsurprisingly, small cars are doing quite well, despite the industrywide plight. In May, small-car segment sales clocked an increase of 2.5%. Even in the light-duty trucks segment, small-sized SUVs increased by 9.6% over May 2010.

Ford's compact Fusion and Focus saw an increase of 10.2% and 31.7%, respectively. General Motors' (NYSE: GM  ) Chevrolet Cruze sales were up 40%. Clearly, smaller cars continue to hold demand, and they just may save auto companies from a double-dip crisis.

Incentives watch
Interestingly, in spite of price increases and lower incentives, the average transaction price for light vehicles was $29,817 in May, up 2.1% from last year, reaching the highest-ever recorded levels. This is a strange trend within the industry, especially at a time when consumers are being pinched in all sorts of way.

Cutting incentives means more profits per unit for the companies, of course. But TrueCar estimates incentives should go up again after May. That should translate into better absolute sales.

Foolish final thoughts
Industry research house A.T. Kearney estimates 13.2 million cars to be sold this year, and 16 million by 2013 in the U.S. AutoNation (NYSE: AN  ) forecasts industry's sales to be around 12.5 million. Ford and GM have maintained their forecasts of 13.5 million and 13 million, respectively. These are pretty solid numbers and investors should take note that all may not be lost -- even after a tough May.

As production and demand improve, auto companies should find their way back. Now if we could only figure out that little gas price problem, we'd be fantastic.

Neha Chamaria does not own shares of any of the companies mentioned. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 09, 2011, at 6:01 PM, adriano22 wrote:

    Although I agree with the comment that higher gas prices may have contributed to the slow down in sales during the month of May. I find hard to believe that the increase in price (0.4% by Ford) had anything to do with it.

    The reason?

    Well is very simple, that increase in prices represented an average of around $350.00 more per vehicle. Which by the way, when an average consumer compares the price increase with the savings in fuel that can be obtained with a newer model (since vehicles are more fuel efficient now a days) it turns out to be a no-brainer.

    I am completely bullish on the auto industry. At least for a few more quarters. I currently have a position in Ford Motor Company (F)

    If you would like to see what I have to say about Ford please visit my latest post. Where you will find research and analysis done by me.

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