The U.S. auto industry posted another year-over-year sales decline last month. Total industry sales slipped 0.5% to 1.44 million units. That translates to a seasonally adjusted annual rate of 17.76 million vehicles, according to Autodata.
Not surprisingly, General Motors (NYSE:GM) and Ford Motor (NYSE:F) both reported that sales were lower year over year in September. However, the sales pace remains red-hot by historical standards. Moreover, despite an uptick in incentives, Americans' thirst for larger vehicles likely supported profitability.
GM sales slip -- but not by much
General Motors reported a 0.6% year-over-year decline in U.S. deliveries for September. A 14.1% increase in Buick sales (largely driven by the new Envision crossover) was more than offset by an 8.7% drop for the GMC brand.
Looking by product category, full-size truck sales fell by double digits compared to a monster performance in September 2015. GM also delivered fewer crossovers in September than it did a year earlier, whereas sales of passenger cars rose. This went against the recent trend of consumers upgrading from cars to crossovers.
On the bright side, sales of lucrative full-size SUVs surged, as did sales of GM's midsize pickups, the Chevy Colorado and GMC Canyon.
Ford's sales decline looks worse than it is
Meanwhile, across town, Ford reported a 7.7% year-over-year decline in deliveries last month. Most of the damage came from passenger cars, sales of which slumped more than 20%. Ford posted smaller sales declines for its lineup of crossovers, SUVs, vans, and trucks.
However, it's important to note that Ford notched a remarkably strong sales performance in September 2015, with deliveries up 23% year over year. Even with last month's 7.7% decline, sales were up 13.5% compared to September 2014.
Indeed, tough comparisons didn't plague just Ford last month -- they were a major reason for the industry's year-over-year sales decline. September 2015 was one of the best months ever for the U.S. auto industry. To put it a different way, if last month's seasonally adjusted sales pace were sustained for a full year, it would beat the annual sales record set in 2015.
Will discounts crimp profit margins?
One potential cause for concern was an uptick in discounting last month. J.D. Power estimates that incentives hit a record $3,923 per vehicle during September. That's even more than what automakers were offering during the darkest days of the Great Recession. Incentives were up by more than $400 per vehicle relative to September 2015.
To provide some context, manufacturer incentives have averaged about 10% of average transaction prices (ATPs) in recent years. However, incentive spending averaged 12.6% of ATPs across the industry in September, according to General Motors. GM's own incentive spending rose to 13.1% of ATPs.
However, while incentive spending is on the rise, ATPs are increasing even faster. For example, GM reported that its retail ATPs after incentives were up about $1,000 year over year last month. Customers are buying larger, more expensive vehicles and higher option packages, more than offsetting the higher discounts.
Obviously, trucks and SUVs do cost more to build than passenger cars. Similarly, adding bells and whistles to a vehicle costs money. But more expensive vehicles (and higher trim levels) almost always produce higher profit margins. At worst, the trade-off should be neutral for automakers' margins.
Expecting solid Q3 results
During Q2, when discounts averaged a more typical 10% of ATPs, General Motors posted a record adjusted North American operating margin of 12.1%. Ford was not far behind, with a strong 11.3% operating margin in North America.
With incentive activity running at a higher rate during most of Q3, GM and Ford are likely to report somewhat lower margins for last quarter. Nevertheless, I expect both automakers to post solid North American operating margins around 10%, in line with their long-term goals. In just a few weeks, we'll find out whether they managed to do so.
Adam Levine-Weinberg owns shares of General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. 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.