U.S. automakers like General Motors (NYSE: GM ) and Ford Motor (NYSE: F ) have made a big comeback since the Great Recession. They have improved the quality of their vehicles while becoming more disciplined about pricing. Rather than over-producing and then resorting to big discounts to clear inventory, in recent years the automakers have been quicker to trim production to match demand.
However, U.S. automakers -- and particularly GM -- now face their toughest challenge yet. U.S. auto demand is no longer growing as quickly as it has in the last four years, making market share battles all the more important. GM has faced some resistance from buyers in its attempts to boost average transaction prices for the new 2014 Chevy Silverado (and its sister truck, the 2014 GMC Sierra).
These problems were compounded by weak auto industry sales last month, as bad weather kept potential car and truck buyers home. Now, GM is rolling out big discounts on some versions of the 2014 Chevy Silverado and 2014 GMC Sierra for its President's Day sale: particularly for versions with V-6 engines. Investors have to hope these discounts don't hit the bottom line too hard.
Market share falls and inventory rises
GM's pickup sales trends have been very choppy in recent months, but January represented the company's worst under-performance in terms of sales volume. Combined Chevy Silverado and GMC Sierra sales plunged 17%, while Ford's F-Series sales fell just 1% and Ram pickup sales grew 22% year over year.
GM did see more improvement in average transaction prices. However, while its attempts to hold down incentive spending for the 2014 Chevy Silverado allowed it to close the transaction price gap with Ford, the sales slowdown drove inventory to a dangerously high level.
Meanwhile, GM's share of the full-size pickup market fell to 33% in January from a very strong 39% share in January 2013. Ford picked up a point of market share to reach 39% while Ram jumped more than four points to reach 21%. Historically, GM's share has usually been in the 35%-40% range.
Given that the overall pickup market is unlikely to post double-digit growth as it did last year, GM needs to either boost its sales numbers or cut back on production.
Enter the incentives
GM is opting for the former strategy. The company is ramping up incentives on the 2014 Chevy Silverado and 2014 GMC Sierra as part of its President's Day sale. GM has placed a particular emphasis on moving the slow selling V-6 engine option. In a few cases, GM's incentives are exceeding $7,000 per truck, and some dealers are pushing the discounts past $10,000!
Some auto analysts have weighed in to urge investors not to panic about the spike in incentive spending. January is always the slowest sales month of the year, and it's typical for automakers to cut incentives during January before boosting spending again in February.
In fact, Ryan Brinkman of JP Morgan claims that GM's sequential increase in incentives is actually lower than the five-year average for the January-February period. Meanwhile, Citigroup's Itay Michaeli points out that GM's January average pickup transaction price was $3,000 above the average for 2013. Thus, GM has room for some incremental discounts while still boosting ATPs.
Viewed in context, the big discounts that GM is offering on some 2014 Chevy Silverados and GMC Sierras aren't cause for panic. However, the company is skating on thin ice, considering just how high its pickup inventories are.
Weather may have been a big factor in depressing January auto sales, but so far, February's weather isn't looking much better! GM cannot afford another month of weak pickup sales, or it will have to ratchet up incentive spending even further.
Another warning sign for investors is that GM has projected surprisingly low earnings for Q1. Last week, GM CFO Chuck Stevens stated that GM expects Q1 earnings to account for only 10%-15% of the full-year total. Nevertheless, the company maintained its forecast for full-year-earnings growth. This has led to an odd situation where analysts expect a double-digit decline in EPS for Q1 but double-digit growth in EPS for the full year!
Personally, I am always wary of back-loaded-earnings projections. Sometimes, these forecasts are accurate, but other times, they are the result of executives crossing their fingers and praying that conditions will improve in a few months. Time will tell which is the case for GM.
My Foolish colleague Daniel Ferry recently told readers that he's buying GM stock because the stock is cheap despite the company winning accolades for many of its new models. He attributes GM's low earnings multiple to investors' skepticism that GM can deliver on its earnings growth goals.
For now, count me among the investors who are skeptical of GM's earnings targets. So far, the company has not been nearly as adept as Ford at balancing pricing and sales volume. If GM needs to ramp up discounting further or slash production of the 2014 Chevy Silverado to bring inventories back in line, earnings could fall well short of projections. As a result, I wouldn't consider investing in GM until it gets two or three months of solid sales under its belt.
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