SAAR came in at 16.833 million for February 2020, down about 0.5% from January’s revised figure, but up 1.9% from February 2019. However, part of this gain is attributable to calendar quirks as not only was 2020 a leap year, but this extra day fell on a Saturday, providing the first February since 1992 with five selling weekends. Through February, 2.49 million light vehicles have been sold in 2020, up 4.5% from last year. This increase comes entirely from light trucks, as year-to-date volumes have increased 11% for this segment while autos have declined 11% over the same period. Trucks have made up 74% of light vehicle sales so far in 2020, up from 70% last year and continuing a trend since 2012 when trucks were just under 50%.
As seen above, SAAR has been below 17 million in eight of the past twelve months with an average of 16.938 million. Solid performance in the first two traditionally slow months of the year puts 17 million units within reach for the year, though expectations in the range of 16.5 million to 16.8 million certainly seem plausible. February’s performance may not be duplicated in March due to uncertainty surrounding the impact of COVID-19, commonly known as the Corona Virus.
On the supply side, the key question will be how the virus impacts automotive manufacturers and their abilities to source products. Shutdown of Chinese plants has caused manufacturers to find alternative means, which can add to costs. If problems linger, the ramifications would likely decrease volumes globally, as Goldman Sachs recently downgraded its outlook on 2020 global auto sales to a 3.5% decline from 2019 per the Wall Street Journal. Vehicle sales in China were down a whopping 80% in February compared to the prior year. Similar effects were felt in countries where the disease has begun to spread with South Korea, Japan, and Italy, down 20%, 10.7%, and 8.8%, respectively. While the impact on the U.S. has thus far been much lower than these countries, sales volumes are likely to be adversely affected. While the mortality rate is estimated at or below 1%, the economic fallout has already proved to be significant due to the uncertainty and panic.
As for demand, there is little data available to determine the preliminary affects of the virus. However, should foot traffic decline with consumers limiting their social exposure, sales would likely decrease as internet sales have increased but the online experience remains far from substituting the experience of test drives. As discussed above, selling weekends are particularly important to the industry, which are in jeopardy if consumers opt to stay at home.
On March 3, the Fed opted to cut rates 50 basis points to support the economy while citing domestic economic strength. This rare inter-meeting rate cut was the first such cut since October 2008, but this did little to ease markets as the S&P 500 still finished the day down 3%. According to interest rate futures, an additional 25 basis point cut is nearly certain at the meeting on March 19-20 with a greater than 50% chance this cut is 50bps.
Lowering interest rates seeks to induce economic activity, and specific to the automotive sector, this cut in part seeks to induce consumers into purchasing vehicles. While discounts may make people buy more on their weekly trip to the grocery store, a relatively small reprieve in ongoing interest payments is unlikely to change the decision of whether to make such a significant purchase as a car for most consumers. Lower funding costs also seek to encourage business expansion, though dealerships’ position in the supply chain (last stop before consumer) limits the impact rate cuts will have on their decision making. Dealers rely on their manufacturers for inventory, who in turn rely on the companies building these parts which means dealers’ supply will feel second-order impacts with minimal ability to navigate these changing market dynamics. However, lower interest rates should reduce floor-plan costs, which represents a nice benefit. If volumes are adversely affected, floor-plan costs will drop even further with less inventory on the lot. But as business owners are acutely aware, not all operating expenses are tethered to activity, and prolonged sluggish activity would weigh on dealerships, like many other businesses, particularly those with significant debt burdens. Like everyone else, we will continue to monitor the situation.
The global uncertainty and equity market volatility resulting from COVID-19 may present investors with an opportunity to buy at a depressed valuation. Similarly, auto dealer owners who are bullish on the long-term investment merits of their business may see this as an opportunity to transfer their interests to future generations in a tax-efficient manner. The professionals of Mercer Capital can assist in the process. For more information or to discuss an engagement in confidence, please contact us.