As I mentioned during my recent Real Vision interview, one of the manufacturers I'm most concerned with going forward is FCA. For the month of January, FCA reported a year-over-year sales increase of 2.5%. However, closer inspection reveals that most of the overall sales increase was fueled by a 49.8% increase in fleet sales while retail sales declined by 6.5%. More importantly, FCA's current day supply of vehicles stands at 120 days based on last month's sales and inventory levels or 97 days if using a 3-month sales average to reduce the volatility caused by seasonality.
I personally view day supply as one of the most important indicators for future production and margin potential. At this time, I view FCA's day supply as a severe headwind for 2019. I say severe because the significant increase in day supply is not due to a decrease in sales (8.5% increase in 2018), it's due to an overproduction of vehicles (24.9% increase in U.S. production in 2018 according to WardsAuto). At the start of 2019, it's apparent that the imbalance in sales and production still exists and even more apparent that it's not sustainable. It's very likely that a combination of higher incentive spending and a reduction in production volume will be necessary to bring supply levels down to healthier levels. This, of course, means bad news for revenue and earnings comps for 2019. The only way to avoid production cuts at this point would be to increase sales volume significantly in order to justify the very aggressive rate of production. A significant increase in sales volume is something that I don't think can be accomplished given current market conditions and a decrease in sales volume will only make the situation worse.
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