Everyone loves a good surprise, and what better way for the U.S. auto industry to kick off spring than with a surprising 6.4% sales increase over the prior year? It was a better-than-expected result and the industry's largest year-over-year sales gain since February of 2016. After over a year of pessimism, plateauing sales, and plummeting passenger car sales, investors can be forgiven for over-hyping last month's result, but how strong was it really? Let's dig into some of the highlights to see why investors should temper expectations going forward.
Spring surge
It didn't take long for 2018 to start looking better than 2017 as March was already the auto industry's second gain of the year, compared to 2017, when the first gain didn't roll around until September. Last month's seasonally adjusted annualized sales rate (SAAR) checked in at 17.49 million, which blew away analysts' estimates calling for 16.8 million.
"Consumers are keeping the U.S. economy growing and auto sales very healthy," said Mustafa Mohatarem, General Motors' chief economist, in a press release. "The job market is strong, consumer confidence is at decade-high levels, and we see clear evidence that business owners are taking advantage of tax reform to upgrade their fleets."
All said and done, sales through March are up 2% compared to the prior year, and some investors are feeling more optimistic than they have in months -- but one quarter doesn't make a trend.
Individual highlights
For the first time in 18 months, Fiat Chrysler Automobiles (FCAU +0.00%) investors had reason to cheer during the sales report, as the automaker snapped out of its monthly sales decline streak with a 14% sales gain over the prior year. FCA's strong month was driven by its Jeep brand, which posted its best month of sales ever and a ridiculous 45% increase over the prior year, to nearly 100,000 units. Jeep was able to take advantage of consumers' hardy appetite for SUVs, which powered FCA to sell more vehicles at retail than its rival Ford Motor Company (F +6.56%), an uncommon achievement for the smaller automaker.
Speaking of Ford, Detroit's second-largest automaker topped expectations with a 3.4% sales gain in March. The folks at the Blue Oval were able to offset an 8.1% sales decline in its car segment with SUVs and trucks up 7.5% and 6.7%, respectively. While Ford's SUVs lacked the impressive sales gains that Jeep recorded, it was good enough for the segment's best March ever. One data point that Ford can hang its hat on is average transaction prices (ATPs). Ford notched the highest transaction prices of any full-line automaker at $36,300 per vehicle in March, driven by a large $1,700 ATP increase for its F-Series trucks, which reached an average of $46,800 per truck. In fact, Ford's overall ATPs were up roughly twice the rate of the industry's $700 ATP gain.
Ford's 2018 Super Duty. Image source: Ford Motor Company.
March's strong sales gains weren't limited to Detroit automakers as Toyota (TM +2.02%) quietly put the finishing touches on its best first quarter in a decade. Toyota's sales moved 3.5% higher during March and notched over 507,000 vehicles sold during the first quarter. The Japanese automaker, historically known for its passenger cars, couldn't escape the decline in demand for smaller vehicles as its Camry and Corolla posted sales declines of 1.1% and 4%, respectively. Fortunately, the Rav4, Highlander, Tacoma and Tundra made up for it with solid gains of 9.1%, 19%, 21%, and 14%, respectively.
Pump the brakes
While the first quarter of 2018 has been better than expected for the auto industry, there are certainly reasons to temper expectations going forward. One thing to consider is that sales volume from March might seem slightly inflated because there were 28 selling days last month compared to 27 during March of 2017. Also, as we drive through the months ahead, interest rates are expected to rise four times throughout 2018, which will make borrowing more expensive and will also increase consumers' potential monthly payments. Further, sales have been driven recently through increased incentives and deals, which must be managed to ensure solid profitability, so a pull-back on those deals could slow sales.
If those factors weren't enough to temper auto investors' expectations, consider that years of aggressive leasing strategies will unload millions of fresh, off-lease vehicles that will provide compelling options for consumers instead of new vehicles.
March was a surprisingly strong month for the auto industry, and the first quarter checked in better than the prior year -- but investors would be wise, for the reasons stated above, to temper their expectations for sales in 2018.
