General Motors (NYSE:GM) is years behind Ford (NYSE:F) in certain aspects, such as operating margins in its North American region. That's mainly because Ford has put much of its effort into consolidating platforms, improving operations and running plants at optimal capacity. On the other hand, GM's luxury Cadillac brand is years ahead of Ford's Lincoln lineup and continues to rebound in today's market – sales are up 30.3% through July. With that success you'd expect high fives across the Cadillac conference table and raises galore. Instead, one top Cadillac executive was fired and another recently quit. So is Cadillac's surge really that impressive, or is there a much longer path ahead?
After the first quarter, GM drove home press releases that Cadillac was surging and announced that its year-to-date sales increase of 38% was its best since 1976.
"Cadillac is back," said Bob Ferguson, vice president, Global Cadillac in a press release. "Our growth is product-driven, new luxury vehicles with dramatic design and performance drawing new customers to showrooms."
There's no doubt about the above statement's validity regarding new product design and vehicle performance driving customers to showrooms. More importantly 70% of ATS buyers are choosing the flashy ride as their first Cadillac, stealing market share from rival luxury brands.
Cadillac's CTS previously had found major success; years ago it won Car and Driver's highest award three consecutive years in a row. The 2014 CTS will be redesigned and looks to impress consumers with its upgrades when it hits the showroom.
The claim that Cadillac is back isn't quite correct in the grand scheme of sales:
To be fair, as the automotive market continues its rebound from the depths of the recent recession, nothing is really "back". The overall market would somewhat replicate the above graph as well.
Still, Cadillac sales have a long journey to get back to the very successful days of old. The part that GM has been so excited about, regarding its best increase since 1976, is the uptick at the end of the graph circled in red – and that's projected from the first half of sales, not guaranteed. In addition to that, I started the vertical axis at 100,000 or the uptick would hardly be noticeable. Here's a better look at the circled part of the graph – Cadillac's monthly sales over the last year – without projecting the next six months.
Why it matters?
The reason all this matters to investors is that a successful luxury line is very important to automakers profits and margins. The vehicles represent incremental sales and revenues because, at higher transaction prices, the vehicles don't compete with main brands like Ford or Chevrolet, and are packed full of premium tech options which is good for top- and bottom-line growth. On top of all that, the world's largest and fastest-growing automotive market, China – where GM has a solid market position – is expected to grow its luxury appetite at a good pace throughout the decade.
GM seems well positioned to take advantage of growth opportunities for its luxury lineup. A few years ago Cadillac was essentially a three-vehicle lineup, but now looks to grow to as many as 10 models in 2015. GM's next generation CTS hits the showrooms this fall and the Escalade arrives later with its first redesign in eight years. Cadillac is also developing a seven-passenger crossover as well as a smaller crossover, and redesigning its SRX. It also plans to introduce the LTS which will compete with the BMW 7 series and Mercedes-Benz S class – scheduled to launch in 2015.
Digging into the numbers provided me with a solid and often forgotten investing lesson – always dig deeper, and don't start research with a biased idea. In reality, Cadillac isn't quite back yet, there's a long road ahead of the company, but I believe it will get there. It looks to be a good ride for investors if Cadillac continues to replicate its recent product quality and performance – at least that part of Cadillac is back, and that's what Ferguson meant.