Auto Inventory at 24-Year Low May Spur Profit, Output

Auto Inventory at 24-Year Low May Spur Profit, Output

 

 

By Keith Naughton

Sept. 2 (Bloomberg) — General Motors Co., Ford Motor Co. and Chrysler Group LLC may be able to boost production and cut profit-sapping incentives as unsold vehicles at dealers plunged to the lowest level since at least 1985.

Inventory at the end of August stood at 39 days for GM, 35 days for Ford and 28 days for Chrysler, Himanshu Patel, a JP Morgan Securities analyst in New York, wrote in a research note today, a day after the first monthly gain in U.S. auto sales since 2007. A 60-day supply is the industry standard.

“The low inventories should help support a significant increase in auto production,” Rod Lache, a Deutsche Bank analyst, wrote in a note that said second-half North American output may rise 49 percent from the first half. “In addition, we believe low inventories could help support margins.”

Having fewer cars and trucks available makes it easier for automakers to win sales without offers such as rebates and discount loans. Ward’s AutoInfoBank said the supply at dealers is the lowest since it began tracking the data in 1985. Ford, after reducing inventory all year, said the average price buyers paid for its vehicles rose $2,000 in the second quarter.

Lower inventory “should help with average transaction prices,” Brian Johnson, an analyst at Barclays Capital in Chicago, said in an interview. “Ford has shown the most inventory discipline in the last six months and they’re the only U.S. company that hasn’t fallen into the arms of the taxpayer.”

39-Day Supply

Industrywide inventory has fallen to 39 days heading into the expected sales slide after the end of the U.S. government’s subsidies of as much as $4,500 for trading in older less fuel- efficient vehicles, Lache wrote. The U.S. automakers averaged at least 80 days during the past seven years, according to the New York-based analyst.

Industry inventory stood at 60 days a year ago, according to Ward’s AutoInfoBank, a research firm in Southfield, Michigan.

Ford, which had a 123-day supply of vehicles in January, trimmed inventory by analyzing buyer data to decide which models to build, said George Pipas, the company’s sales analyst. That resulted in a 95 percent reduction in the number of variants produced of its Ranger pickup, he said.

“We’re building models more to specifications than on speculation,” Pipas said. “We’re using computer models to zero in on what customers want and what they order.”

Ford reduced its incentives 27 percent this year through August, according to research firm Autodata Corp. of Woodcliff Lake, New Jersey.

‘Step on Gas’

With inventory down, “most automakers will say, ‘We need to step on the gas a little bit to get our stocks back up,’” said Michael Wall, an analyst at consultant CSM Worldwide in Okemos, Michigan. “They should have some pricing power, though you’ll still see incentive actions to gin up consumer demand.”

Industry incentives averaged $2,548 a vehicle last month, a drop of $290, or 10 percent, from a year earlier, according to Autodata. Edmunds.com, an industry data provider based in Santa Monica, California, calculated the decline at $327, or 12 percent, to $2,475.

“Cuts in production have helped keep inventories leaner,” said Jessica Caldwell, a senior analyst at Edmunds.com.

Production Outlook

North American auto production will rise to 5.2 million in the year’s second half, a 49 percent increase from 3.5 million in the first six months, Lache estimated. Ford said Aug. 13 that it was boosting second-half output 26 percent.

Chrysler said today that it’s adding a second shift with about 850 workers at an Illinois plant as the company increases output of the Dodge Caliber small car by 10,000 units this year.

Automakers book revenue when they ship new vehicles from the factory, rather than when the cars and trucks are sold to consumers by dealers. So boosting output quickly translates into an increase in the companies’ revenue.

U.S. auto sales rose 1 percent in August, the first monthly increase since October 2007, on the strength of the federal “cash for clunkers” program, which ran from July 27 to Aug. 24. The annual sales pace for the month was 14.1 million, up from 11.2 million in July and 9.7 million in June.

The August rate would have been 10.5 million without the “clunkers” program, GM and Dearborn, Michigan-based Ford said.

The offers “just drained inventories,” Mark LaNeve, sales chief at Detroit-based GM, told reporters yesterday, noting that the automaker has fewer than 300,000 vehicles at dealers, compared with 1.4 million four years earlier.

Ford fell 21 cents, or 2.9 percent, to $7.03 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have more than tripled this year.

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