A new forecast indicates that new-car sales in the U.S. will probably fall once results for the month of May come in -- but that may not necessarily be bad news for the automakers.
A tough headline number that won't tell the whole story
Analysts at online car-shopping service TrueCar (NASDAQ:TRUE) are projecting that total U.S. light-vehicle sales in May will fall 4% from May of 2015. That sounds troubling. But that decline comes with an important note: There's one less weekend in May of 2016 versus May of last year.
That matters because a lot of cars get sold on weekends, when people have time to take test drives and meet with dealers. If we adjust for the fact that May of 2016 has two fewer "selling days" than May of last year, TrueCar said, the rate of sales will probably increase 4% when results are reported next week.
While a lot hinges on the upcoming Memorial Day weekend, TrueCar thinks the U.S. new-car market is still in good shape.
"Memorial Day kicks off the summer selling season," said Eric Lyman, TrueCar's vice president of industry insights. "The industry is up against a tough comparison with May 2015, with five weekends then versus four this year, but that doesn't diminish the market's underlying health."
Lyman said TrueCar's data is showing consistent strength in demand for new vehicles, particularly for crossover SUVs and pickups. Those are key sources of profit for many automakers, especially General Motors (NYSE:GM) and Ford (NYSE:F).
How Detroit will fare in May
TrueCar thinks Ford's sales will fall 5% in May, but the "selling rate" will be up 2.9% once corrected for the missing weekend. General Motors, which has been making a point of cutting back on sales to rental fleets, will see a larger decline in overall sales in May, TrueCar predicts: Down 7.9%, or an 0.3% drop in adjusted selling rate.
Fiat Chrysler Automobiles (NYSE:FCAU), which has been making moves to increase its production of pickups and SUVs, will be the only major automaker to post a year-over-year sales increase (1.2%) for the month, TrueCar predicts. On an adjusted selling-rate basis, FCA will post a 9.7% increase, according to the forecast.
Are incentives rising?
"Incentives" are those cash-back or cheap-financing deals automakers love to advertise. They're used to boost demand for slow-selling models, or to adjust a model's pricing as competitors make moves.
It's important to watch incentives carefully when sales have been strong for a while and investors are starting to express concerns that the market has peaked. Incentives tend to rise when sales growth stalls, as (some) automakers turn to discounts to gain ground.
Not only is that a sign of a peak in the market, it's a sign that automakers' profits may start to get squeezed: Big spending on incentives can boost sales, but it can also quickly erode hard-won profit margins.
The good news is that incentive spending across the industry seems to have fallen a bit in May from April levels (which weren't bad). TrueCar estimates that Ford's average spending on incentives per vehicle sold will be $3,433 in May, down 2.3% from April. GM and FCA will have spent a bit more than Ford per vehicle, according to the estimate, but spending for both will also be down versus April. If demand for pickups and SUVs remains strong, as Lyman expects, that bodes well for second-quarter profits at all three automakers.
The takeaway: Don't be (too) worried if auto sales drop in May
If TrueCar's estimate is on target and U.S. auto sales drop in May, don't be too alarmed. We'll have to take a closer look at the underlying data once we have it next week, but it looks likely that the drop will be more about a quirk of the calendar and not an indicator that the new-car market in the U.S. is deteriorating.
John Rosevear owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors and TrueCar. 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.