1 Scary Detail Lurks Behind Strong Auto Sales

Auto sales are booming in America. But ... for how long?

The New York Times reported earlier this week that automakers as a whole scored a 17% increase in sales for the month of August, moving 1.5 million pieces of metal for the month -- and suggesting sales for the year could hit a post-financial crisis high of 16.09 million.

In its most recent quarter, Ford (NYSE: F  ) beat nearly all comers, notching a 15% gain in sales versus the year-ago quarter, and grew its profits 19%.


Ford's F-150 -- the best-selling truck in America, Source: Ford.

At General Motors (NYSE: GM  ) , profits were down year over year -- but sales were still up by 4%. Balancing out GM's poor results, Chrysler-owner Fiat S.p.A. (NASDAQOTH: FIATY  ) likewise grew sales 4%, but grew its profits more than fourfold!

However,one troubling trend suggests that the good times may not keep rolling much longer.

According to the U.S. Federal Highway Administration , the average amount Americans drove in a month in the U.S. hit its peak in July 2004. Total vehicle use -- a figure inflated by rising population numbers -- continued chugging along until it, too, topped out in August 2007. It's been all downhill from there.

When the odometer stops turning
Total vehicle miles traveled in the U.S. dropped in the first half of 2013, relative to 2012 data, and the average American today drives just 820 miles per month -- 9% fewer than we did nine years ago. The number of young people applying for driving licenses, too, is down. Kids in their teens and 20s -- and even their 30s -- are all down "significantly" since before the most recent recession, according to the Associated Press.

What's to blame for all this? Some people blame the Great Recession, of course, and the toll it took on American wallets. Others point to high gas prices as making car ownership, and driving in general, less attractive than it once was. And then there are the other culprits -- taxes, insurance costs, and the high sticker prices.

To those factors, add traffic jams, government initiatives to promote walking and bicycling to work, and the simple fact that, in this day and age, we just don't need cars as much as we used to, what with Amazon.com offering to deliver almmost anything to your doorstep -- and promising to expand its grocery delivery service soon, as well.

Some commentators -- University of Michigan  transportation researcher Michael Sivak among them --  blame social networking for the fact that people are driving less frequently than they used to. Last quarter, Facebook's revenue was up 53% -- easily eclipsing the sales gains at any of Detroit's Big 3. Facebook's "daily active users" tally increased 27% year over year, to 699 million. That's an awful lot of folks who may be logging on, instead of buckling up, when they want to "hang out" with their friends.

So why is anyone buying cars at all?
Despite all this, Ford still grew its sales 15% last quarter. How? Well, in large part, this is a factor of "pent-up demand." Spooked by the Financial Crisis, a lot of people took a "brake" from buying cars over the past few years. The average car on America's highways today is 11.4 years old, and in serious need of replacement.

For a time, this mini-trend of replacing worn-out vehicles will continue to bolster earnings at Ford, and at its competitors as well. It may even turn out that analysts are right about Ford being able to grow its earnings at close to 14% annually for the next several years. Maybe.

Foolish takeaway
Whatever the short-term trends may be, though, people just aren't driving as much as they used to. And as a result, they don't need to buy cars as much as they used to need to, Unless something happens to reverse this trend, it's going to be bad news for Ford in the long run. 

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Read/Post Comments (4) | Recommend This Article (5)

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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 September 07, 2013, at 6:09 PM, spawn44 wrote:

    That's Al Gore AGW scary Rich. What tops that Rich is when the next Ice Age hits. All these cars sales will be snowmobile sales.

  • Report this Comment On September 08, 2013, at 1:44 AM, DeckardB26354 wrote:

    I suppose I would be more inclined to buy a new car if I drove more miles per month. My car is 15 years old and in tip-top condition, giving me no valid reason to trade it in and make payments again. I am enjoying no payments now.

    Also the unit cost to make each car is probably around 1/10th to 1/12th the MSRP, and the idea that it costs about $1,500 to $2,000 per car to actually make but sell for $25,000 is unacceptable to me. Also, the fact that retired union autoworker pensions and fat CEO salaries are rolled up in the price of a new car, and that really irks me to no end.

    All that aside, most new cars rolling off the assembly line have defects, safety bulletins and recalls right from the factory, and I'm not down with that. In other words, the automakers are rolling cars off the lot that are just not 100% ready for the road. And they feel cheap compared to my car. Too much aluminum and plastic gives today's cars a "disposable" feel, and if you're making payments on them, the total of payments is between four to seven times the amount the car is worth at the end of the payments.

    Bottom line: it is never a good idea to make payments on a depreciating asset. I would think it better to buy a good used car with cash, and own it, rather than make payments and pay far more than the car is actually worth.

  • Report this Comment On September 08, 2013, at 12:33 PM, TMFDitty wrote:

    Good story on similar data in this month's issue of Popular Science, by the way. Pick up a copy if you're interested -- $5 for a year's subscription on some of the discount magazine websites, and you can help save the print media industry while you're at it ...

  • Report this Comment On September 08, 2013, at 12:34 PM, TMFDitty wrote:

    And spawn44 ... check out ACAT if that's your theory :)

    18x earnings, 20% projected growth, and no debt...

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