As previewed, the earnings results from the automotive manufacturers (OEMs) and franchise dealership groups showed that the back-up in interest rates since June caused auto sales to slow; moreover, declining unit economics impinged on profits and cash generation. This includes at the high-end, or premium, (BMW, Mercedes, etc.) with sales in the U.S. slowing at a time when the OEMs are under assault in the previously highly profitable China market, as well as the European market. We see this in Placer in the softer traffic, ex-hurricanes for Penske Automotive Group (72% premium+ brands), Lithia (31% luxury), and Asbury (29%), as shown below. The well-running domestic mid-tier brands (Ford and GM, etc.) also slowed.
Looking at Lithia’s Texas business in Placer, we see that visitors were down -5%, but prior & post visitation to other car shop & services POIs was down -20%. We believe that many potential buyers visit several brands before deciding on a purchase. Thus, the -20% decrease suggests fewer buyers in the market. (We use Texas to move away from the quarter’s hurricane impacts.) On a nationwide basis, Lithia’s comparable units sold decreased by -4%. The -4% breakdown can be split between new (+2%) and used (-10%). The company lost share in used as the industry was up 3% per the Bureau of Economic Analysis. Texas was a particularly soft market for Lithia as we show in the two charts below, which management acknowledged on the earnings call. (Recall that September lost a Saturday of selling which is why the month decelerated substantially from August; however, excluding that shift, the trend was still slowed into the end of the quarter as the chart above shows.)
The stronger results by Asbury in Texas also has to be a concern for Lithia as Asbury is investing to grow its market presence in the state.
Asbury CEO David Hult said of the quarter and its higher exposure to Chrysler-Dodge-Ram (held by Stellantis), “Stellantis in particular, continues to be a headwind for our business. To give you some context, our 20 Stellantis locations are seeing year-over-year new volume declines of 30%, with gross profit per vehicle down over 53% from Q3 of 2023.” These comments tie-in with our recent articles about Stellantis.
All three of these franchise dealership groups reported soft used vehicle results; recall that CarMax reported better results; as such, CarMax’s better results imply even stronger execution by CarMax than was previously understood. Moreover, CarMax noted that part of its quarter’s strength stemmed from getting more later-model in-demand inventory onto their lots. By contrast, Lithia noted a shortfall in its used inventory sourcing, which led to its soft used results. Penske noted the same. (As a reminder, later-model used inventory is scarce because the high rate of depreciation of the 2021-2022 purchased new vehicles has left the owners underwater in the amount still owed on the loan. As such, they are not in the market with a trade-in to offer. For Lithia, 54% of its inventory comes from trade-in.)
Asbury CFO Dan Clara said, “Until the pool of used vehicles gets back to more historical levels, we will prioritize unit profitability over chasing volume. We will continue to evaluate our approach and adjust to market conditions.” Asbury is a financially strong operator with scale advantages (IT, marketing, buying, operating efficiencies, etc.), and so, if they are holding back from unit sales of used autos, that’s saying something. Moreover, other operators, that are not advantaged, are going to be further pressured which may lead to an acceleration in industry consolidation.
Carvana reported stellar Q3 results, outperforming the industry on every metric as shown in the table above. Key to its results was differentiated sourcing to offer buyers in-demand models and its contemporized sales experience. Q3 results were far above expectations and the momentum is building. The 2-year unit growth figure improved by 22 ppts and the Q4 guidance points to another 20 ppt acceleration on the 2-yr CAGR, with Q4 1-year growth expected to be above Q3’s +34%. As shown in the chart below, trailing 4-week visits are up +40% in October. As such, management must feel great about the near-term and longer-term business, hence the stronger outlook for Q4.
On its earnings call, Carvana CEO Ernie Garcia shared about the path to success, “Over the last 11 years and $10 billion, we laid the foundations of a highly differentiated model that delivers highly differentiated customer experiences at scale. Over the last 2.5 years, we have learned hard thought lessons that led to rapidly driving operational and financial efficiencies across the business. And over the last 9 months, we have paired our highly differentiated customer experiences and highly differentiated financial model to simultaneously become the fastest-growing and most profitable automotive retailer. A simple way to think about this is the gap between Carvana and our competitors in growth and financial performance is equal to the gap between Carvana and our competitors in customer experience and business model quality. If you take a moment to reflect on that framework, what does it imply for our ultimate market share? We find our answer to that question to be very exciting, especially because we aren't done digging our moat. We continue to see significant opportunities for further improvement in every part of the business...We have already invested in and built the most difficult to obtain and expensive infrastructure required to enable scaling and that infrastructure unlocks efficient growth to a significant multiple of our current size. We currently have built out reconditioning infrastructure to support over 1 million retail units per year. Beyond that, we have enough physical real estate to support over 3 million retail units per year.” (The industry does about 45 million units per year, with half that being consumer-to-consumer). Thus, Carvana’s realistic total addressable market is something like 15M-20M units. 3M units of 17.5M is a 17.1% share position.)
Back to new car sales and the Detroit 3 (Ford, GM and Chrysler), as shown in the chart below, October has shown a bounce up in activity, the result of increased incentives from Chrysler-Dodge-Ram bringing traffic into the dealerships, and Ford and GM responding with increased incentives (i.e., OEM-funded cash on the hood). October is also the period when the new 2025 models hit the showroom floors. (We’ve selected California in the chart to again step away from the hurricane effects in the East.) And so, it’s good to see consumers respond to new merchandise and lower prices; in other words, the consumer is spending, but buying is at where they can get greater value. Lithia’s unit economics on new (its gross profit per unit) for Q3 was $3,226, down -26% year-over-year. Q4 2024 unit economics are expected to be sequentially lower, despite it being a new model quarter. And so, if more money is put on the hood in the months forthcoming, both from the OEMs and the dealers, we’d expect to see an improving trend in new vehicle sales as we close out 2024. But do profits grow in 2025?
Stellantis (Chrysler-Dodge-Ram) CFO Doug Ostermann said on its earnings call about the U.S., incentives, and the like, “We've engaged in a very fundamental review of the entire go-to-market approach, and I identified ways to improve our performance at the top of what we refer to as the purchase funnel in terms of ensuring we have a healthy share of voice at the middle of the funnel, where we identify and progress qualified leads with our dealers and at the bottom of the funnel, where the right pricing and incentives maximize conversion to sales. In Q3, we enhanced incentives on 2024 and older model year vehicles, both in terms of increasing the amount, but also importantly, making them more customer facing. Meanwhile, on some model year 2025 vehicles we're adjusting MSRPs to be lower in a way that increases the transparency for and consideration by consumers. And this also reduces the need for incentives. I'm pleased to report that we're seeing encouraging early indications. Not only improving market share in August and September, but with improvements in qualified leads for our dealers. October is shaping up nicely. We don't have the final figures yet, but we project an approximate 10% increase in unit sales versus September…. At Stellantis, we see our goal as providing clean, safe, affordable freedom of mobility to all, right? And so that affordability piece of it is particularly challenging because as the industry continues to introduce more and more technology on many vehicles, the OEMs have been walking away from absolute affordability. And so one of my big to-do list items now as the new CFO is to really look at cost, look at affordability and work on that over time [because affordability has become] a huge issue [for the industry].”
Finally, we thought we'd comment on electric vehicles (EVs) and Tesla. First, Ford’s CEO Jim Farley said as it relates to the OEMs, “In our home market in the U.S., no OEM is immune. Since Q1 of last year, EV volumes have grown 35% while revenues in total are flat at $14 billion. That means the progress on volume has been fully offset by prices. We're expecting roughly 150 new EV nameplates to hit North America by the end of 2026. And some of our competitors are already resorting to very aggressive lease tactics even on their brand-new products, which creates huge residual risk and overhang and brand damage.” We know that none of the OEMs (other than Tesla) make any profit on their EV line up, but that deficiency also extends to the dealer where the unit economics on an EV sale are far behind an ICE sale." Asbury’s Clara also noted, “From an EV standpoint, I break it down by brand, and I'm going to start with luxury, then I'm going to move on to the imports and domestic. But on the luxury side of it, we're seeing GPUs holding on pretty good with BMW and Lexus. And I'll just give you a specific example. So with one of our partners, we run about a $3,500 front-end GPU. And in EVs, that number is in the $2,800 range. But then when we go into some of our domestics, we're starting to see a little bit steeper decline in GPUs. And in some cases, that number is a negative number in the front end of the EVs...But overall, the EV, we're seeing a negative impact to the [consolidated] GPU.” And so, are the dealers going to be working extra hard to sell an EV, or an internal combustion engine (ICE) vehicle, or hybrid? We’ve been writing about the slowdown in EV adoption for over a year, that disincentive may be one more reason for the slowdown, beyond the effect of high interest rates, high rates of depreciation, higher repair costs, range anxiety, and the like. However, for Tesla that isn’t an issue as they have a different sales and product model, direct-to-consumer, and all EV.
The chart above of visitation to dealerships in California above shows that Tesla is running roughly flat year-over-year. However, that’s not the full story. As is typical, CEO Elon Musk has been making a lot of headlines, notably around Texas. In Texas, comparable visits are up +16% and two-thirds of the 17 comparable dealerships are up. Moreover, around 2.5K visits per location per month in Texas is only 25% of what top locations in California produce. And so, while Tesla may be generally mature in California, that’s not true in other large vehicle markets like Texas. Moreover, the Cyberbruck outsold every othe available EV in Q3, save the Model Y and Model 4 per Kelly Bluebook. Total Tesla brand visits were up +6% year-over-year in Q3. The GM brands also did well. Not up were German EV models, which were crushed. Volkswagen has had significant negative headlines for the past two months. For Q3 in California visits were flat, but those who are putting significant cash on the hood. Per Motor Intelligence, Volkswagen has the highest dollar value of incentives in the market for its segment at $5,895. Competitor Volvo is second at $4,873. By contrast, Toyota is at $1,739 and Hyundai is at $2,705.
On its earnings call, Musk said, “[W]e do expect to roll out [self-driving] ride-hailing in California and Texas next year to the public. Now in California, there's quite a long regulatory approval process. I think we should get approval next year, but it's contingent upon regulatory approval. Texas is a lot faster, so we'll definitely have it available in Texas and probably have it available in California, subject to regulatory approval, and maybe some other states actually next year as well, but at least in California and Texas. So I think that would be very exciting. That's really a profound change. Tesla becomes more than a sort of vehicle and a battery manufacturing company at that point.” And so, Texas is a focus for Musk to get as many Tesla owners in the state as possible to have the state ready for self-driving ride-hailing. More Tesla awareness builds more usage, which builds more network usage, better network monetization, and more vehicles, repeat.
Musk said “[investors should] plan on 20-30% unit growth next year, notwithstanding negative external events, like if there's some force majeure events, some big war breaks out or interest rates go sky high or something like that. We can't overcome massive force majeure events, but I think, with our lower-cost vehicles, with the advent of autonomy, something like a 20% to 30% growth next year is my best guess.” (For 2024, units will about even with 2023.) For 20%-30% to happen, prices would need to come down further to improve affordability to a larger number of consumers (see Stellantis’ comments above, this means removing technology and features), lower interest rates would also help. However, we suspect that Musk is counting on something more; namely, significantly less EV competition next year, both in the U.S. and Europe. Should the $7,500 tax credit for EVs made in North America (this includes Mexico) lapse, that would be far more harmful to OEMs that have far less scale than Tesla has on its EV models (i.e. everyone of its competitors). They would give up and focus on just ICE and hybrid vehicles. Tesla also has other fast growing profitable businesses.
Tesla also makes and sells energy generation (solar) and storage products. This business unit delivered +52% revenue growth in the quarter and deployed +73% more MWh is storage. As shown below, the number of shifts worked in Q2 and Q3 were down year-over-year. We suspect that the down reflects greater productivity at the factory. Gross margins for the segment are likely to be around 28% for 2024 versus 19% in 2023, the result of a 50% increase in revenue and a lower rate of expense growth. A fast growth, highly profitable energy business is one more advantage in Tesla’s favor.
