General Motors (NYSE: GM) broke with auto industry tradition earlier this year, discontinuing its monthly sales reports. Instead, investors had to wait until the end of the second quarter to learn about the automaker's recent sales trends.
It was worth the wait. Last week, GM reported a sizable increase in domestic vehicle deliveries for the second quarter, bucking long-running fears about "peak auto." While the possibility of a trade war is a real near-term risk for GM, the company is also positioned to profit from updating its product line in some high-volume, high-margin market segments.
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Another quarter of strong sales
GM got off to a slow start in the U.S. this year, but it bounced back in March with a double-digit increase in deliveries. The net result was that total deliveries rose 3.8% and retail deliveries ticked up 0.8% during the first quarter.
Domestic sales growth accelerated last quarter. GM and its dealers delivered 758,376 vehicles, up 4.6% year over year. The company saw particularly strong sales in the pickup market, with deliveries up 21% year over year. GM also achieved big gains across its lineup of crossovers and SUVs. The recently updated Chevy Traverse did particularly well, with deliveries up 30% year over year despite a big increase in average transaction prices (ATPs).
Incentive spending creeping up again
The only potential caution flag for investors in General Motors' second-quarter deliveries report was high incentive spending. Incentives reached 13.4% of ATPs last quarter. That was down from 13.8% in the first quarter, but up from around 12% a year earlier, and substantially higher than the industry average of 11.8%.
Investors often see rising incentive spending as a sign of automakers' desperation and worry that it foreshadows an all-out price war. However, there are several reasons not to be concerned about the recent uptick in incentive spending at GM. First, despite higher incentive spending, ATPs rose by about $300 year over year last quarter.
Second, GM is using discounts to maintain lean inventories at dealers. At the end of the second quarter, dealer inventory was down about 20% year over year.
Third, big discounts on pickup trucks are probably distorting General Motors' overall incentive levels. GM will start selling all-new versions of its Chevy Silverado and GMC Sierra light-duty pickups later this year, so it's not surprising that it needs to offer bigger discounts to sell the outgoing models. Since pickup trucks tend to carry extremely high profit margins, these discounts won't break the bank.
New products should lift sales and earnings
The light-duty truck launch in late 2018 will be followed over the next two years by updated versions of GM's heavy-duty pickups and full-size SUVs. All of these products are extremely profitable to build, and they combined for more than 1 million deliveries just in the U.S. during 2017.
Meanwhile, General Motors will fill in some of the remaining white space in its crossover lineup later this year. The new Chevy Blazer midsize crossover will slot in between the Chevy Equinox and Chevy Traverse -- both of which have been redesigned recently, and both of which are extremely popular. The Cadillac XT4 will give GM's luxury brand a much-needed second crossover and a more affordable option than the larger XT5. Other new crossovers could arrive in 2019 or (more likely) 2020.
By upgrading its pickup and full-size SUV models and expanding its lineup of crossovers, General Motors is giving customers more of what they want. That's likely to drive continued market share gains and strong profitability in the critical U.S. market over the next few years.
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