On Monday, General Motors (GM 1.20%) officially reduced its forecast for 2017 U.S. vehicle sales during a conference call with analysts. The auto giant now expects U.S. industry sales to be in the low 17 million range, compared to its original expectation that sales would end up near 2016's record mark of approximately 17.55 million.
At first glance, this seems like bad news. After all, it confirms the growing sense that the U.S. auto market has passed its cyclical peak. Nevertheless, GM has a good shot to continue posting strong EPS results in 2017 and beyond.
Sales are weak in the least profitable part of the market
While General Motors had to reduce its industry sales forecast for the year, it also noted that retail sales remain quite strong. Retail sales are currently on pace to fall just shy of last year's total of 14.3 million.
Car sales have been declining in the U.S. recently. Image source: General Motors.
Additionally, GM gained 0.2 percentage points of retail market share during the first five months of the year. Even better, the vehicle mix is improving. There is solid demand for crossovers, SUVs, and trucks, along with weaker demand for lower-margin cars.
Most of the sales weakness is on the fleet side of the market. Several automakers -- led by GM -- are deliberately reducing sales to rental car companies. A moderate number of rental car deliveries can be helpful, as rental car customers are effectively "test-driving" their vehicles. But these sales tend to carry low margins. To make matters worse, rental car companies only keep cars for a year (on average) before they hit the used vehicle market, where they can pull down residual values.
Thus, the market segments where sales are slowing were never big profit drivers for GM. In the most lucrative parts of the market, sales and pricing remain quite strong.
New vehicles will power results
Right now, an inventory glut poses the biggest risk to GM's profitability. The company expects to end June with roughly 110 days of supply in inventory, compared to a year-end target of 70 days supply.
Scheduled downtime for vacations and new vehicle launches will help take a bite out of inventory this summer. Additionally, General Motors is slashing production of small and midsize cars that aren't selling. However, GM could also get a sales boost from some new vehicles it is launching this year, helping it overcome the current inventory glut.
GM is launching new products in key market segments this year. Image source: General Motors.
Dealers have already begun selling the new 2018 Chevy Equinox, GM's entry in the popular and highly competitive compact crossover market. This is the first all-new Equinox in eight years. The new model helped drive a 17% jump in retail sales of the Chevy Equinox during May, although the outgoing 2017 model still accounted for the majority of sales in that month.
By late summer, dealers will begin selling the next-generation Chevy Traverse full-size crossover. This is the first all-new Traverse since 2008. With favorable market trends in this segment, GM hopes that having a fresh product will lead to big sales gains in late 2017 and throughout 2018.
The sale of Opel will boost GM's profit, too
Another piece of good news for General Motors is that the planned sale of its European Opel unit is on track to close soon. As a result, GM will begin reporting Opel's results as discontinued operations for the second quarter.
Removing its European operations from the mix will immediately lift GM's earnings by hundreds of millions of dollars on an annual basis. It will have an even bigger positive impact on free cash flow.
Lower U.S. auto sales certainly represent a risk to earnings at General Motors. However, there are also plenty of factors supporting EPS growth. These include the ongoing strength of the crossover, SUV, and truck markets; GM's introduction of new products in key market segments; and the pending Opel sale. As long as U.S. industry sales remain in the 17-million-plus range, GM is likely to continue churning out massive profits.
