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On the Need for Better Auto Sales Metrics

by: Markham Lee September 05, 2008 | about stocks: F / GM / HMC / TM    
Markham Lee

Markham Lee

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While reading through a summary of the August auto sales numbers I began to think about the need for a better set of metrics to gauge the monthly sales performance of auto makers (from one year to the next and in comparison to each other), because the current set is often misleading and doesn't provide much insight into a respective automaker's financial health.

First off there is my usual gripe that total units sold isn't an especially good predictor of profitability, due to the existence of a significant number of car companies that sell fewer cars than GM (GM) or Ford (F) yet generate significantly greater profits, i.e. the issue isn't total cars sold, it's total profits and profits per car sold.

The business media is stuck on the idea of Toyota (TM) pursuing GM for the sales crown and GM's market share, when by the metric that matters (profits) Toyota left GM in the dust ages ago.

The other issue is that focusing on total units sold doesn't account for pricing differences between automakers: the average selling price (and profit margin) for a Porsche is significantly higher than that of a Hyundai, so within certain volume ranges Porsche can sell fewer cars than Hyundai yet generate significantly more revenue and earnings. As a result it wouldn't really make sense to call Porsche a "smaller" automaker than a higher volume competitor that generates fewer profits.

Another example is the American manufacturers using heavy discounts to prop up car sales, GM's 20% YoY drop is undoubtedly worse than advertised when you realize that for the month of August they were mostly selling cars at employee discount prices. Car companies should report any changes in their average selling price from one year to the next, so that investors are better able to judge the overall quality of their sales.

At the end of the day I'm not saying toss out the total units sold metric, I'm merely saying that it would make more sense to also include the following (at minimum):

YoY change in Avg. Sales Price

Avg. Sales Price

Total Revenue Generated

Total Incentives per car

Having a typical profit earned per car metric would be useful as well.

If automakers provided the metrics above investors would be better equipped to determine the quality of a particular month's sales, as opposed to the current situation where we're comparing GM's money losing apples to Honda's (HMC) profitable oranges.

Finally in terms of judging the relative size of a car company it would probably be better to use profitability, and profitability per car sold as the key metric, so you're looking at the relative size of various companies based on their respective ability to generate profits.

Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.

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This article has 3 comments:

  •  
    Sep 05 09:02 AM
    why bother at all?
    Only someone totally absent from reality would buy any car company stock right now anyway. Besides, GM and Ford are beyond bankrupt and the only way they can stay in business is as GSE's ....
    Reply
  •  
    Sep 05 11:56 AM
    I cannot say how much I agree with this post. Does Wal-Mart report unit sales of socks each quarter? Does Armani seem doomed because it sells only 1% as many suits as Value City? The auto industry, with its fascination with units, lumps a Maserati with a Mazda and a Maruti as all the same thing. Thus we get frenzied pursuit of developing markets, which represent "all the growth." In units, yes, but GM itself has forecast that ten years from now in REVENUE terms the developed world's share of total automotive sales will have hardly budged at all, even as its UNIT share falls. I'd rather be selling 50 Porsche Turbo's a year than 50,000 Tata Nano's...
    Reply
  •  
    Sep 06 02:27 AM
    What a silly, naive notion! You seem to be proposing that auto companies ought to report profitability monthly. Can you name one industry that does that?

    For insights into a company's financial health, read its quarterly financial report. Publicly held auto companies, like other industries, release their financial results quarterly in considerable detail, usually available about a month after the period ends. The auto industry reports dealer (not factory) sales by vehicle line every month, usually on the first or second business day of the subsequent month. There are also monthly production reports by vehicle line, which actually are more indicative of the manufacturers' revenues. You apparently don't realize that revenue is recognized by a manufacturer when a vehicle is produced (and sold to a dealer), not when the dealer delivers it to a final customer. When dealer sales of a particular vehicle don't correspond with factory sales (i.e., production), the resulting change in dealer inventories may be a harbinger of adjustments to future production schedules, either up or down.
    Reply
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