Automakers Trucking For Fatter Margins With Model Upgrades

General Motors (NYSE:GM) finally unveiled the much-awaited 2014 versions of Chevrolet Silverado 1500 and GMC Sierra on December 13.  With the new models, GM’s pickups could close in on Ford Motors‘ (NYSE:F) F-series, the highest selling pickups for 35 consecutive years. ^[1] Sales of Silverado pickups are flat at 368,000 units this year compared to those of F-series, which are up 12% to almost 577,000 units. The light truck category, which includes pickups and SUVs, accounts for 60% of GM’s American sales. ^[2]

See full analysis for General Motors

GM’s truck sales turned red in November while Ford Motors (NYSE:F) and Chrysler registered growth of 2.8% and 9.6% respectively. Due to this unexpected decline, GM’s truck inventory swelled to 139 days in November from 110 days in October. The automaker cited higher incentives offered by its competitors as the reason for the decline in truck sales. Usually, anything above 60 or 70 days worth of inventory is considered excess and a sign of a weakening demand. To make up lost ground, GM is offering hefty discounts of up to $5,000 on the Silverado in order to clear the existing stockpile before the new models go on sale next year. ^[3]

Higher Margins On Trucks

Although the U.S. car market is expected to outpace the light truck market, the automakers still view trucks as an attractive market due to higher margins associated with them. Ford, which posted record operating margins of more than 11% last quarter, sees long-term margins shifting to 8-10% in the U.S. since the percentage contribution of lower-margin, small cars to total sales is expected to rise.

Besides GM, Toyota Motors (NYSE:TM) has also debuted a new RAV4 at the Los Angeles auto show and is targeting a 20% sales gain in the U.S. in 2013. Light trucks have so far accounted for 48% of total auto sales this year. The growth rate might have slowed down in the second half due to high gas prices and as customers show a greater predilection for smaller and trendier cars. However, with construction and housing spending improving, the demand for pickups should continue to remain strong. Since pickups are used extensively in construction and industrial activities, their sales have a direct relation with construction and housing spending. ^[4]

We have a $26.90 price estimate for General Motors, which is about 5% more than the current price.

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1. Ford F-Series Trucks Number One for 35 Years Running, January 25, 2012, ford.com [↩]
2. U.S. auto sales, wsj.com [↩]
3. GM Boosting Discounts to Sell Trucks Seen as Holiday Gift, December 11, 2012, bloomberg.com [↩]
4. Lumber Reaches 6-Year High as Housing Rebound Erodes U.S. Supply, December 18, 2012, bloomberg.com [↩]