As an avid basketball fan, I know there's certainly some truth behind the phrase "Live by the three, die by the three." A basketball team shooting lights out from beyond the arc can overcome a significant deficit to win the game or turn a competitive game into a blowout in quick fashion.
Metaphorically speaking, automakers like General Motors (NYSE:GM) typically live and die by the success or failure of full-size truck, SUV, and crossover sales. When the economy is surging and gas prices are low -- or when SUV fuel economy improves, as has done recently, and helps offset gas prices -- Detroit automakers thrive. The opposite was true during the recent recession, when you couldn't give SUVs away, and it forced General Motors and Chrysler to file for bankruptcy protection.
Automakers thrive during more prosperous times because trucks and SUVs haul in much larger profit margins than passenger vehicles. It's no surprise that General Motors has been posting excellent results during the recent rebound in large-vehicle demand; the automaker reported second-quarter 2015 operating margins in North America of 10.5%, which is excellent and represents its eighth consecutive quarterly year-over-year increase. By selling higher-priced SUVs, crossovers, and pickups, GM posted earnings of $1.29 per share, excluding special items, in the second quarter, which was well ahead of Wall Street's expectations of $1.08 per share.
The good news for GM investors, and something investors in other automakers should watch, is that GM is taking advantage of increasing SUV sales -- for one thing, by planning the addition of a new SUV model in 2017.
But just how well are SUV sales doing, does this trend have staying power, and how well will GM's new SUV fit into the lineup?
Looking at segment sales trends in the U.S. new-car market, it's clear where the growth is. Through the first half of 2015, total crossover sales are up 14.3% through July compared to the same time period in 2014. Total SUV sales through the first half of 2015 are up 10.3% compared to last year, while sales of cars are down 1.9%.
So, there's a clear trend of booming SUV and crossover sales compared to sales of passenger cars. And it's a trend that's likely to stick around as vehicles in SUV and crossover segments continue to improve their fuel efficiency -- consumers are no longer paying a fortune to fuel a road-hogging SUV that gets eight miles to the gallon, as we saw a decade ago. Instead, they are opting for SUVs and crossovers similar to a Chevrolet Equinox, which can get up to 32 miles per gallon on the highway.
Furthermore, General Motors plans to introduce its yet-to-be-named SUV into the midsize segment under its mainstream Chevrolet brand. It's a good move to fill a gap in the brand, especially when other automakers are focusing on designing a smaller SUV, such as Jeep's Renegade or Honda's HR-V.
As a GM investor, one concern I had was whether the new midsize SUV would overlap with current products and thus cannibalize other Chevrolet SUV sales. While that's a legitimate concern for investors as a company adds to its product lineup, the automaker is taking steps to prevent cannibalization by downsizing the Equinox when the next generation hits the road in early 2017, which would leave more of a product gap between the Equinox and Traverse for the new midsize SUV to slide in and attract its own consumers.
While it can be worrisome for investors in automakers to see them live and die by the SUV and truck segments, it is important to maximize profits at a time when gas prices are low and the economy is improving. As General Motors rolls out its new midsize Chevrolet SUV, it should end up being a great move for the company and its investors.