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September US Auto Sales Lag on Weak Car Demand, Rising Rates

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Rising interest rates and uncertainty in price, induced by tariff fears, have discouraged consumers to buy new vehicles in the recent months. Further, the current sales figure look gloomier due to strong sales in September 2017.

Overall, automakers have witnessed a decline in vehicle sales and plummeting demand in the past month.

Buyers splurged on SUVs (sports utility vehicles), crossovers and pickup trucks, while passenger car sales declined, similar to prior months. Selling bigger vehicles is supposed to be a profitable drift for automakers but their inability to adjust to this shift has led to declining sales. Moreover, the companies offered discounts to get rid of their passenger car stocks.

A strong economy encouraged Federal Reserve to hike interest rates. For new vehicles, the average annual interest rate increased to 5.8% in September from 4.8% in the prior year. Additionally, price of vehicles is on the rise, per Kelley Blue Book. These conditions worked against consumer demand for new vehicles.

Hurricane Florence, which flooded parts of North Carolina and South Carolina, has pushed consumers in the affected regions to replace their damaged vehicles with new ones. In September 2017, Hurricane Harvey wrecked havoc as well, damaging a large number of vehicles, thereby creating a huge demand for auto parts.

Last Month’s Figures

Per Autodata Corp., in September 2018, seasonally adjusted annualized rate of sales (SAAR) of U.S. car and light-truck sales was 17.44 million vehicles, which was the highest since November 2017. The figure was above analysts’ expectation of 16.9 million. However, in last September, SAAR was 18.1 million units, marking the highest since 2005.

Among the big auto manufacturers, General Motors Company (GM - Free Report) doesn’t report monthly sales anymore. However, its third-quarter vehicle sales declined 11.1% from the prior-year quarter. Similar to most of the players, with increasing SUV demand, the company witnessed a sharp decline in passenger car sales. However, General Motors expects to recover in the fourth quarter, when it starts shipping new products.

In September, sales of Ford Motor Company (F - Free Report) declined 11.2% while Fiat Chrysler Automobiles N.V. (FCAU - Free Report) witnessed 14.7% rise from the prior year. Fiat Chrysler sold 2,400 more vehicle units compared with Ford, which was not a common phenomenon. One of the key reasons for Fiat Chrysler’s augmentation can be attributed to its decision of ditching passenger car models many years ago. The rising trend of SUVs aided the company. Its SUV brand, Jeep witnessed sales increase 14.1% year over year while Ram and Dodge brand witnessed increase of 9.2%, and 40.6%, respectively.

Among other automakers, sales of Honda Motor Co., Ltd. (HMC - Free Report) , Toyota Motor Corporation (TM - Free Report) , Nissan Motor Company (NSANY - Free Report) and Volkswagen AG (VLKAY - Free Report) declined 7%, 10.4%, 12.2% and 4.8%, respectively.

Ford, Toyota, Honda and Nissan currently carry a Zacks Rank #3 (Hold). Volkswagen and General Motors carry a Zacks Rank #4 (Sell) while Fiat Chrysler carries a Zacks Rank #5 (Strong Sell).

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

Long-term growth rate for Ford, Toyota, Honda, Nissan, Volkswagen, General Motor, and Fiat Chrysler are 5.3%, 6%, 2.9%, 4%, 5.9%, 8.2% and 25.3%, respectively.

After a strong first half in 2018, the second half is expected to be dull for the auto industry, with plunging vehicle sales. Rise in tariff rates will discourage carmakers to import cheaper auto parts and components, and make those dependent on auto parts offered by local suppliers. This will increase costs for carmakers, forcing those to pass costs to consumers, which, in turn, will lead to rise in vehicle prices. This, along with elevated interest rates, is expected to curb consumers’ investment in new vehicles.

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