Detroit (TheStreet) -- If auto sales are an important economic indicator, then the recent performance of the largest U.S. automaker ought to raise a few concerns.
General Motors (GM) reported weak sales in December and January. It missed fourth-quarter estimates, prompting some analysts to reduce future earnings estimates. Its inventories have increased and it is offering high incentives to truck buyers this month. None are good signs.
GM shares closed Monday at $34.90, down $1.21. Year to date, GM shares are down 14.6%, while Ford (F) shares are down 4% and the S&P 500 is down 2.6%.
The reason for Monday's decline was the widespread reporting about discounts of up to $7,000 off list price for Chevrolet Silverado and GM Sierra as part of a Presidents Day promotion. The discounting added to concerns over GM's disappointing fourth-quarter earnings, reported Thursday, which called into question the company's future earnings outlook.
In a recent report, Deutsche Bank analyst Rod Lache wrote that the fourth-quarter earnings call made him "incrementally more cautious," although he retains a buy recommendation on GM.
As for January sales, GM reported a 12% decline while overall U.S. light-vehicle sales fell 3%.
Weaker auto sales are not encouraging, particularly given two consecutive weak job reports, slowdowns in emerging economies including China and, of course, the stock market's poor year-to-date performance.
Auto sales, most importantly retail auto sales, reflect decisions on what is commonly the second biggest consumer purchase after a home, and they are reported monthly, typically the day after the month ends, providing up-to-date economic snapshots.
In January, when U.S. auto sales came in lower than expected, the decline was universally attributed to bad winter weather. But sales also fell in December, with the decline attributed primarily to sales being pulled into November because of the late Thanksgiving weekend, as well as winter weather. Industry sales in December rose 0.3%, while GM sales fell 6% and Ford sales rose 2%.
November was the best U.S. sales month in six-and-a-half years, with the seasonally adjusted annual sales rate reaching 16.3 million, the highest total since February 2007. But in January, the SAAR had fallen to 15.2 million.
Since Labor Day, U.S. new-vehicle sales have risen just 2% year over year, compared with a 10% gain in the 12 months before that, and inventory levels are high, according to Automotive News.
The trade journal reported Monday that "supplies of unsold vehicles have ballooned to the highest level since the recession, and U.S. sales growth has slowed significantly in the past five months" and called the trend "an ominous combination that could mean a return of bigger discounts and lower profit margins throughout 2014.
"Each of the Detroit 3 started February with more than a 100-day supply of unsold vehicles, enough to last until roughly Memorial Day at the slow January selling rate," Automotive News said. "Across the industry, automakers had 88 days' worth of vehicles as of Feb. 1, the most for that date since 2009, when the industry's downturn was at its worst."
Lache isn't worried by the high inventories. He said inventories typically decline by 25 days between January and March. "This year's declines should be even larger," he said, because weather contributed to higher inventories. Additionally, he said, "GM and Ford both appear to be taking a conservative stance on production."
In the fourth quarter, GM reported net income excluding items of 67 cents a share. Analysts surveyed by Thomson Reuters had estimated 87 cents. GM shares closed that day at $35.23, down a penny from the previous close, despite being down 88 cents in intraday trading.
UBS analyst Colin Langan wrote in a report that shares initially lost ground on the earnings miss, but recovered on the realization that the miss was due to one-time factors. He maintained a buy rating and raised his target price to $52 from $49, but he reduced his full-year 2014 estimate to $3.70 from $3.90 a share. Analysts surveyed by Thomson Reuters are estimating $3.93.
In his report, Lache noted that "much of the U.S. auto cycle and GM product cycle is behind us," although he said he still believes "that strong North America earnings, market share, inventory trends and share repurchase announcements will be helpful" for GM. He has a buy on the shares and a target price of $48, down from $52, reflecting a reduced 2014 estimate of $3.55, down from $3.90 a share.
Written by Ted Reed in Charlotte, N.C.
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