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3 Takeaways From January's Automotive Sales Data

By Daniel Miller - Feb 5, 2018 at 6:04AM

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As the U.S. new-vehicle market plateaus, there are a few things investors should keep an eye on.

The U.S. new-vehicle market streak of annual gains ended at seven, as 2017 posted a slight 1.8% decline. There's nearly a full calendar left for 2018 to plot its own course, but initially analysts predict this year's sales to decline slightly from 2017, even though January -- generally the industry's weakest month of sales volume -- started off with a 1.2% sales gain.

Beyond those 10,000-foot-view figures, let's look at some of the more intriguing takeaways from last month's vehicle sales data.

Tax boost?

One of the biggest questions facing investors in all parts of the stock market is what effect tax reform will have. It's an interesting question for the automotive industry, as large pickups sell well in the U.S. and drive larger transaction prices and margins. The good news for investors in Detroit automakers such as Ford Motor Company (F 0.55%) and General Motors (GM 0.81%) is that tax reform could give businesses incentive to purchase trucks.

"With construction and related small businesses active in the pickup market, the net result should improve the after-tax earnings of some small-business owners -- which could boost pickup sales for their small fleets," Barclays analyst Brian Johnson noted to investors, according to Automotive News.

Before investors get too excited about a potential boost from high-margin truck sales, consider that analysts also believe any gains from tax reform will be partially or entirely offset by a likely rise in interest rates in March.

Healthy sales mix

Despite plateauing sales in the U.S. new-vehicle market, the sales mix continues to favor automakers with a strong lineup of SUVs, trucks, and crossovers -- which all drive better top and bottom lines than passenger cars do. In January, light-truck demand jumped 8.1%, compared with an 11% decline in cars. Take Detroit's largest automaker, General Motors, for example: Its crossover sales increased 20% in January, and its cars declined 30%. Ford's truck and SUV sales were more resilient compared to its overall 6.6% decline for the month, with trucks gaining 2.2% and SUVs declining only 5.9%. Ford's car segment did not do nearly as well, recording a 23.3% sales decline in January.

Row of trucks at a dealership lot

Image source: Getty Images.

Heck, even Toyota (TM 0.26%), which until recently has been known for its success with passenger cars rather than larger vehicles, posted a huge 17% total sales gain in January, thanks to its light trucks. Toyota's RAV4, Highlander, and Tacoma were up 20%, 22%, and 34%, respectively. Both Toyota's namesake brand and its Lexus brand set records for light-truck sales last month, up 26% and 24%, respectively.

Spending big

One of the downsides to the automotive industry is that when sales plateau and competition heats up, automakers spend money on incentives to move vehicles off dealership lots. Doing so can help maintain or gain market share, but it costs the company valuable margin. According to estimates from ALG, the consulting arm of TrueCar, the average incentive on a new vehicle jumped almost 10% to $3,812 in January, compared with the prior year. According to the same ALG estimates, Detroit automakers Ford, GM, and Fiat Chrysler Automobiles were among the largest spenders on incentives last month, with Nissan joining the Detroit trio. This will be one of the key factors for investors to watch, and the automotive market will only remain healthy and lucrative if incentives don't balloon throughout the year. 

Despite rising incentives and slowing sales, there are still quite a few factors in auto investors' favor. Equity markets continue to test record highs, unemployment remains low, consumer confidence is strong, and tax reform will help push the economy. Expect 2018 to be another strong year for the auto industry, even if it logs another slight decline compared with the prior year.

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Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
$36.12 (0.81%) $0.29
Ford Motor Company Stock Quote
Ford Motor Company
$12.85 (0.55%) $0.07
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
$155.89 (0.26%) $0.41
Nissan Motor Co., Ltd. Stock Quote
Nissan Motor Co., Ltd.
$7.59 (-0.46%) $0.04
Fiat Chrysler Automobiles N.V. Stock Quote
Fiat Chrysler Automobiles N.V.

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