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Passenger Car Sales Hit Low: Will Others Follow Ford's Suit?

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A thriving economy and favorable job market are boosting consumers’ confidence in buying vehicles from a diverse range available in the market. With steady sales, the auto industry is witnessing a preference shift from passenger cars to sports utility vehicles (SUVs), pickup trucks and crossovers. Spacious vehicles like SUVs are a more striking option for consumers, thus, leading to a plunging demand for passenger cars. This changing landscape has enforced automakers to focus more on SUVs than passenger cars, which were earlier instrumental in driving sales.

Notably, passenger car sales in the United States are witnessing a continuous slump over the past few months. In July 2018, U.S. auto sales plunged majorly due to declining passenger car sales, followed by higher interest rates and gasoline prices. Similarly, in August, auto sales were partly offset by a plunge in preference to passenger cars. U.S. auto sales gained on the back of higher SUV, crossovers and pickup trucks sales.

Per the Cox Automotive, passenger cars dropped below 30% in the market in August, which comprised nearly half of the industry a few years ago. However, sales of compact crossovers and SUVs rose about 14.8%, while mid-sized SUVs and crossovers grew 9.7% to 220,000 units.

This speedily shrinking demand for passenger cars reasonably supports the Detroit-based automaker, Ford Motor Company’s (F) decision to reduce its U.S. line-up of passenger car offerings to only one model in April i.e. Ford Mustang. The decision was taken to focus more on the profitable segments that include light trucks and crossovers, which, per management, is already reaping benefits. In August, sales of Ford’s luxury SUV, Lincoln Navigator rose more than 100% while sales of another SUV, Ford Expedition were up 95%.

Recent Numbers

During August, all major players in the auto market, except for Toyota Motor Corporation (TM - Free Report) , experienced gain in its vehicle sales. Moreover, all the automakers faced a slump in their passenger car sales. Let’s have a detailed look at the segmental performance of the individual companies.

Ford’s truck sales grew 5.7% to 102,173 units and SUV sales rose 20.1% to 78,809 units, while passenger car sales fell 21.3% to 37,522 units. Overall, Ford’s monthly sales rose 4.1% year over year to 218,504 vehicles from the year-ago period’s figure of 209,897.

Ford Motor Company Price and Consensus

Another major automaker Fiat Chrysler Automobiles N.V.’s (FCAU - Free Report) Jeep and Ram brands’ monthly sales rose 19.6% to 87,502 vehicles. Ram witnessed 26.5% rise in sales while Jeep’s Cherokee and Compass SUV’s sales jumped 85%, and 76%, respectively. However, Chrysler, Dodge and Fiat brands were down 3.4%, 18.4%, and 35.2%, respectively.

Fiat Chrysler Automobiles N.V. Price and Consensus

The Japanese automaker, Toyota’s August sales declined 2% to 223,055 vehicles, majorly due to its struggling passenger car sales, which observed a 15.6% fall. However, this was partly offset by 7.4% increase in sales of SUVs, crossovers and pickup trucks.

Toyota Motor Corporation Price and Consensus

Following the similar trend, another Japanese automaker, Honda Motor Co., Ltd.’s (HMC - Free Report) crossover, SUV and pickup sales gained 18.9% while car sales declining 15.3%. The brand’s best-seller CR-V crossover’s sales rose 11.8% to 34,610 units. Overall, the company’s August sales rose 1.3% to 147,903 vehicles.

Honda Motor Co., Ltd. Price and Consensus

German automaker, Volkswagen AG’s (VLKAY - Free Report) monthly sales gained 0.7% to 32,255 units, majorly driven by the brand’s SUVs. Further, per management, its Atlas and Tiguan models, developed primarily for its U.S. customers, are witnessing strong growth this year.

Volkswagen AG Price and Consensus

Toyota, Fiat Chrysler and Volkswagen carry a Zacks Rank #3 (Hold). Honda carries a Zacks Rank #2 (Buy) and Ford has a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term growth rate for Toyota, Fiat Chrysler, Volkswagen, Honda and Ford is 6%, 25.3%, 5.9%, 3% and 5.3%, respectively.

What’s Ahead

With changing customer preferences, it will be tough for the automakers to keep manufacturing their lineup of passenger cars. Furthermore, to keep generating revenues, automakers are frequently launching newer and technologically-enhanced models of SUVs, pickup trucks and crossovers of diverse price ranges. These technological developments and vehicle production require huge investments.

Additionally, automakers are gradually shifting toward electric and autonomous vehicles, which are considered the future of the auto sector. These technological developments require huge investments by the auto companies, owing to high R&D expenses.

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