Credit Suisse First Boston: Transplants to Take 60% of Federal Clunker Cash

Analysts (this armchair pundit included) are busy re-calibrating their expectations of the U.S. new car market post-Cash for Clunkers (a.k.a. C.A.R.S.). The big question hanging over the proceedings: has Uncle Sam [re]created a new car bubble? And, if so, what happens when it bursts (as bubbles are wont to do)? And if so, when? Meanwhile, we’re getting answers to some of the other ponderables, such as who benefits most from taxpayer largess? In a nutshell, not the domestics. Credit Suisse First Boston weighs-in with their take on the C4C tsunami.

We expect the annualized light vehicle selling rate (SAAR) to run in a range of 12.1 – 12.4 million units in July, the mid-point of which would be about 3% below the year-ago pace of 12.6 million, and up sharply from last month’s pace of 9.7 million. We expect unit volume (selling day adjusted) to be down in a range of 4% – 6% versus July 2008. That compares to a year-to-date decline of 35% through June.

• This sales forecast required a little more estimation than normal, on two fronts. First, the BEA has not yet posted the July seasonal factors to its website. So we came up with our own factors by averaging the past July factors, but we stuck to those years when July had 26 selling days.

• The bigger wildcard in forecasting July sales is the impact of Cash for Clunkers. Company contacts, dealer contacts, media reports, and government officials are all reporting the $1 billion allocated to the Clunkers program has been exhausted. Assuming an average scrap incentive of $4,000 per vehicle, that would translate to 250,000 light vehicle sales attributable to the Clunkers program.

• We have made a few assumptions around the actual number of Clunker-related sales that will be entered in the month of July. These assumptions are discussed in detail in the report. In the end, our sales forecast is based on a base run rate of sales in a range of 9.5 – 9.8 million, plus an incremental 235,000 units. We also assume the domestic brands garner 40% of the Clunkers trade-in business, while the import brands take 60%.

• Assuming that our sales forecasts are roughly correct for the month, and that the automakers build approximately to Ward’s July production forecast, we think Big 3 inventories are likely to end July about 20% understocked. Specifically, we see GM dealer stocks ending the month about 13% understocked, Ford inventory ending July about 24% understocked, and Chrysler ending the month about 31% understocked.

• If we assume 1) the SAAR can maintain a pace of 12.0 million units, on average, in Q3, 2) that Q3 production is consistent with Ward’s third quarter production forecast for GM and Chrysler, and 3) that Ford builds consistent with the company’s latest production forecast of 485,000 units . . . then Detroit 3 dealer stocks could end September about 30% below normal.

• This would leave significant upside to the production schedule that we used in this inventory analysis. That production outlook calls for Q3 output to be down about 25% year-to-year, but that could improve greatly if Clunkers can drive a Q3 SAAR of 12.0M.