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October 20, 2016

Ratings agency says US dealer happy time over

The best of times may have passed for US auto dealers with vehicle sales likely past their peak and dealer profit margins slipping, Fitch Ratings said.

The best of times may have passed for US auto dealers with vehicle sales likely past their peak and dealer profit margins slipping, Fitch Ratings said.

However, US auto dealer floorplan (DFP) ABS trust performance metrics and ratings will remain stable heading into 2017 even though auto sales dipped in 2016 and manufacturers used a combination of higher cash incentives and 0% financing to entice consumers into showrooms.

Incentives rose each month going back to early 2015 and were close to US$3,900 per vehicle in September. These sales tactics will continue to eat into dealer profits and push down used vehicle values into 2017. However, dealer profits remain healthy at a lower level, while overall dealer costs, including capital financing costs, stay low. US automobile inventory levels hit 61 days supply to 1 September, the highest level for the month of September going back to 2012. Supply ranged from 55 to 61 days for the same period going back to 2012. Dealers typically aim for a 60-day supply level. Therefore, the current rate is at the top of this range but could rise further if sales dip and production is not managed by manufacturers. Manufacturers with higher inventories included Dodge/Ram (81 days), Ford (78 days; it has announced production cuts), General Motors (74 days) and Chrysler (71 days).

"Dealer profits appear to have plateaued and come off their peak," said Fitch's.

The National Automobile Dealers Association reported dealer profit levels declined 4.1% (pretax) through second-quarter 2016 compared with second-quarter 2015. Dealers' ROE for first-half 2016 was 31.3%, compared to 33.5% when sales peaked a year earlier. Importantly, none of the outstanding DFP ABS trusts have any losses or dealer defaults over the past year, as dealer health is still fairly robust, despite some metrics slowing as mentioned, the majority of dealer networks are all in good shape financially. The number of dealers also remains at a far lower level than the period leading up to, and during, the most recent recessionary period when there was a clear oversupply of dealers – particularly for US networks that issue DFP ABS. Manufacturers are clearly not looking to add dealer locations and this will bode well for the existing dealer networks.

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