Last week, Ford Motor (NYSE:F) reported a strong 6.2% year-over-year increase in U.S. vehicle deliveries for the month of October. Meanwhile, its crosstown rival General Motors (NYSE:GM) recorded a 2.2% decline in deliveries during the same timeframe.
While General Motors' October sales performance certainly wasn't as good as Ford's, investors should be perfectly pleased with its modest sales decline. GM's sales mix continues to shift toward more profitable trucks, SUVs, and crossovers. Moreover, the company has successfully addressed the severe inventory glut it faced earlier this year.
Digging into the October numbers
Ford's 6.2% sales gain last month was driven primarily by strong sales of its F-Series trucks. F-Series deliveries rose 15.9% year over year in October, continuing a long-running trend. (Year-to-date, F-Series deliveries are up 11.1%.) This accounted for 90% of the increase in Ford's total deliveries last month.
However, another key element of Ford's overall performance was stable sales of passenger cars. Ford brand car sales slipped just 0.6% in October, compared to an 18.6% plunge during the first nine months of 2017.
By contrast, General Motors reported a significant decline in passenger car deliveries last month, highlighted by a more than 50% plunge in car sales for the Buick brand. GM offset most of this decline with a solid 11.2% increase in full-size truck sales. SUV/crossover sales increased modestly as well.
It's also important to note that October 2017 had one fewer selling day than October 2016, which dampened sales results across the sector. On a selling-day adjusted basis, GM's sales rose by about 2%.
Inventory is under control again
Earlier this year, General Motors suffered from bloated U.S. dealer inventories. As of the end of May, the company had 963,448 vehicles in stock in the United States, translating to 101 days of supply. A year earlier, GM had just 670,517 vehicles in its U.S. inventory, or 67 days of supply.
GM's high inventory put it at risk of having to offer deep discounts in the event of a serious sales downturn. Fortunately, the company has been proactive about addressing the inventory glut by scheduling lots of extra downtime in the second half of the year.
Those efforts have paid off in a big way. By the end of October, GM's U.S. inventory had receded to 813,648 units, or 80 days of supply. That's down by more than 20,000 units year over year. This puts the company on track to meet its goal of ending the year with about 800,000 vehicles in stock. Furthermore, GM has shifted its inventory mix to better match demand: i.e. fewer cars but more trucks, crossovers, and SUVs.
The General is in good shape for 2018
Right now, the average analyst estimate calls for GM's earnings per share to decline 7% year over year in 2018. This implies a double-digit decline in net income, in light of the company's ongoing share buybacks. Even relatively bullish analysts seem to think that General Motors will struggle to sustain its current level of profitability next year because the auto cycle has peaked.
However, even if U.S. auto sales fall again next year, it's likely to be a modest decline, similar to 2017. (Auto sales are on pace to fall by roughly 2%-3% this year.) In that kind of environment, there's no reason why GM can't be just as profitable as it has been in 2016 and 2017.
After all, the inventory reduction GM has undertaken during 2017 has exaggerated the decline in its production. Additionally, General Motors has been gaining market share recently, thanks to its relatively fresh product portfolio. As a result, GM's production in North America could be flat or up slightly in 2018, even if auto sales decline.
General Motors will certainly face some headwinds next year, such as additional planned downtime for its lucrative full-size trucks. (GM will be changing over to new versions of the Chevy Silverado and GMC Sierra later in the year.) Even so, the company has a legitimate shot at delivering another record EPS performance in 2018.