Entering 2018, auto industry pundits expected U.S. auto sales to decline modestly for the second straight year. However, top domestic automaker General Motors (NYSE:GM) managed to defy that market forecast in the first half of 2018, with U.S. deliveries up 4.2% year over year. This contributed to solid earnings results at GM, despite a substantial headwind from rising commodity costs.
By contrast, GM's domestic vehicle deliveries declined significantly last quarter. Nevertheless, investors shouldn't worry too much about the General's positioning in its home market.
U.S. vehicle deliveries plummet in the third quarter
Whereas its major competitors all report sales on a monthly basis, General Motors now makes investors wait until the end of the quarter to learn about delivery trends. Thus, the automaker's Q3 U.S. deliveries report, released on Tuesday, was highly anticipated.
Experts expected deliveries to be down significantly year over year, due to the timing of fleet deliveries and a spike in replacement demand that occurred in September 2017 in the aftermath of Hurricane Harvey. The magnitude of the drop was still somewhat shocking, though.
GM's total deliveries in the U.S. fell 11.1% year over year to 694,638 vehicles last quarter, with weakness spread fairly evenly across its four brands. This double-digit decline more than offset the solid growth that GM logged in the first half of the year. Domestic deliveries are down 1.2% year to date.
Digging into the details
Full-size SUVs were the biggest point of strength for General Motors last quarter. The Cadillac Escalade, Chevy Suburban, Chevy Tahoe, and GMC Yukon models all logged sales gains, including a 20.1% surge for the Tahoe. These models are extremely lucrative for GM, so it's comforting to see strong demand in this segment.
Sales of midsize pickups rose last quarter, too. Meanwhile, crossover sales held up reasonably well, declining less than the company average.
On the negative side, deliveries of GM's high-margin full-size trucks fell 12.5% year over year. And car sales continued plummeting, with deliveries of the company's two best-selling cars -- the Chevy Cruze and the Chevy Malibu -- falling 27.4% and 45.8%, respectively.
However, the delivery numbers alone don't tell the whole story. First, as noted above, the sharp decline last quarter was partly related to delivery timing, offsetting increases in the first two quarters of 2018.
Second, GM is in the midst of changing over to all-new versions of its Chevy Silverado and GMC Sierra full-size pickups. While the company took steps to mitigate lost production from this model changeover, capacity constraints still hurt its full-size truck business during Q3.
Third, General Motors pulled back on incentive spending in the third quarter. Incentive spending came to just 12% of average transaction prices (ATPs) last quarter, compared to 13.6% of ATPs in both the first half of 2018 and the third quarter of 2017. This also compared favorably to the Q3 industry average for incentive spending at 12.1% of ATPs -- especially considering that GM's ATPs came in about $4,000 above the industry average, at $35,974.
No cause for worry
More-disciplined discounting likely allowed GM to protect its profitability last quarter in the face of rising costs. The decline in full-size truck sales does represent a meaningful earnings headwind, but that was inevitable due to the ongoing model changeover. Once GM fully moves over to its next-generation truck platform, sales should rebound and profitability should be better than ever in that business.
Furthermore, General Motors is poised to expand its crossover lineup with new models that could help it gain market share in that growing category. For example, the Cadillac brand has been hampered in recent years by a model lineup that included just one crossover. Deliveries of the new XT4 crossover -- a smaller sibling to the existing XT5 -- began last month. A larger XT6 model will arrive in 2019.
The other upcoming major product launch is the Chevy Blazer crossover, which will fill the wide gap between the popular Equinox and Traverse nameplates. Production of this new model is set to begin near the end of the year.
With an upgraded full-size truck platform and a growing lineup of crossovers -- not to mention a new free-trade deal for the U.S., Canada, and Mexico -- GM is on track to return to profit growth in the key North America region next year. The recent slump is nothing to worry about.