Tesla & the big three

August 20, 2016 09:00 AM
Increased consumer confidence, a steady job market and lower gasoline prices led to historic sales for U.S. automakers in 2015.

Increased consumer confidence, a steady job market and lower gasoline prices led to historic sales for U.S. automakers in 2015. Sales opened 2016 on a strong note, although unable to match 2015’s pace. 

In spite of the recent softness in auto sales, the industry is incredibly robust. That strength is being driven by changing consumer trends that have favored the purchase of large-ticket items such as autos, homes, appliances and technology, as opposed to apparel and accessories. Lower gas prices have helped push sales of gas-guzzling trucks and SUVs, which come with higher margins and boost overall revenue totals for the automakers. Outlooks for the big three remain high. After the bailout of 2008, most of these Detroit powerhouses have been getting back on track. 

Ford (F) managed to post double-digit profit growth in the second half of 2015 and the first quarter of 2016, but revenue growth struggled to keep up, mostly topping out in the high single digits. Analysts expect the second half of 2016 to show continued improvements. Despite making gradual gains, Ford has the biggest presence in the UK of all U.S. automakers, and will likely see a negative impact from Brexit. 

General Motors (GM) has had a similar narrative, with hot earnings throughout most of 2015, but unimpressive sales growth. Year-over-year revenue growth came in negative from the fourth quarter of 2014 through the third quarter of 2015, and just turned positive in Q4 2015. GM continues to grow and gain retail U.S. share  while outpacing the industry in international markets. GM’s continued success is allowing them to invest in advanced technology and innovations to compete with Tesla (TSLA). GM is also having its hand at the wildly popular ride sharing economy, investing $500 million into Lyft earlier this year, with the hope of launching a self-driving car service in the near future. 

Fiat Chrysler’s (FCAU) story is a little different. The joint company missed on earnings in every quarter of 2015, but surpassed revenue expectations in all but Q4. FCAU got off to a better start in 2016, with a huge earnings-per-share beat of 12¢, but still continues to miss on the top line. 

You can’t talk about the future of automobiles without mentioning Tesla. The lower gas price environment didn’t drive sales away from electric power-focused Tesla to traditional manufacturers, as its target customer is after the cache that comes with owning a cult favorite. Tesla is in the midst of a high investment cycle, which has led to a decrease in its bottom-line for the last eight quarters. Still, the stock tends to move up by an average of 7% in the 30-day post earnings period.

Tesla is also notorious for overpromising and under-delivering on production. TSLA planned for 80,000 to 90,000 deliveries of their Model X and Model S in 2016. The mass-market Model 3, scheduled to go on sale in 2017 for under $35,000 already has seen pre-orders eclipse 500,000, causing Tesla to issue $2 billion in new shares to meet the production demand. While that sounds like great news, there is growing concern over whether they will be able to deliver. Also, adding a third model to its lineup is sure to keep Tesla in the red. 

This period of increased sales and solid bottom-line growth for U.S. auto manufacturers is likely to go away soon. With tech behemoths such as Google (GOOG) and Apple (AAPL) focusing on driverless cars and ridesharing services, the traditional automakers will be required to commit to heavy R&D investment cycles in order to compete, which will surely take a bite out of margins for the foreseeable future.

About the Author

Christine Short is a senior vice president at Estimize. An expert in corporate earnings, she produces content highlighting Estimize data. Prior to Estimize, Christine held positions at Thomson Reuters and S&P Capital IQ. @Estimize