GM's May Sales Plunged 18% in the U.S.: Why You Shouldn't Panic

By Markets Fool.com

America's largest automaker posted a huge decline in vehicle sales last month. General Motors delivered just 240,450 vehicles in the U.S. during May, down from 293,097 a year earlier.

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U.S. vehicle deliveries slumped across all four of GM's brands in May. Image source: The Motley Fool.

At first glance, this news seemed to confirm bears' fears that auto sales have peaked. Indeed, GM shares trade for barely more than five times earnings: an irrationally low valuation unless its earnings power is about to collapse. However, while May certainly wasn't a good month for auto sales, GM's performance was a lot better than it appeared.

Sales plummet -- both retail and rental

GM has been losing market share all year in the U.S. The company has attributed its share losses to a new strategy of sharply reducing sales to rental car companies. Not only are those deals less profitable than retail sales, but they also tend to undermine resale values by generating a steady stream of used cars. That leads to a variety of negative impacts, including making vehicle leases more expensive.

It was hard to argue with General Motors' results during the first quarter. Earnings per share soared 47% year over year even though GM sold fewer vehicles than it did in Q1 2015.

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In May, GM slashed its daily rental deliveries by nearly 22,000 units year over year: more than ever before. Yet whereas core retail sales rose during the first four months of the year, GM's retail deliveries fell by double digits in May.

To put it a different way, the decline in daily rental deliveries accounted for less than half of GM's sales drop. This marks a significant change in the General's sales trajectory in the U.S.: and an ominous one at that.

The sales slump isn't as damaging as it seems

As evidenced by GM's strong Q1 results, declining rental car sales are good for profitability. The potentially worrisome aspect of the May sales report was the 13% decline in retail sales.

Zeroing in on the retail market, it's important to note that there were only 24 selling days in May, compared to 26 a year earlier. Looking at GM's retail deliveries on a "per-day" basis, its sales were down a much more modest 6% year over year.

Some of that decline was caused by supply disruptions related to a series of earthquakes that hit Japan in April. As a result, while early customer demand for GM's new and refreshed vehicles has been strong, dealers haven't had much inventory to sell.

Finally, it's important to note that a key reason why auto investors worry so much about sales slumps is that low demand can lead to bloated inventory and margin-killing discounts. That's not a problem for GM. It ended May with 670,517 vehicles in its U.S. inventory, down 6% year over year. Furthermore, GM's incentive spending represented just 9.8% of average transaction prices last month: well below the industry average of 10.6%.

Time to be patient

Assuming that the decline in GM's May retail deliveries was primarily driven by fewer selling days and supply shortages, its sales trend should recover quickly. Meanwhile, its profit margin isn't likely to falter, as GM has pulled back on discounting.

On the other side of the globe, GM got good news from China last week. Sales in its second-most important market jumped 17% year over year in May, after rising just 1.7% through the first four months of 2016.

Thus, investors probably overreacted by driving General Motors' stock price back below $30 on the basis of one bad month of U.S. sales. All things considered, GM is still doing fine -- and the stock looks like a steal at its current rock-bottom valuation.

The article GM's May Sales Plunged 18% in the U.S.: Why You Shouldn't Panic originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.