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Are Ford's Sales Numbers Inflated?

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Ford's (NYSE: F  ) recent sales numbers have been impressive, and at first glance July's were no exception: Up 5% versus a very strong July 2009, up 24% on the year, "retail market share" up for the 21st time in 22 months, strong results from key products like Mustang, Taurus, and Fusion. It wasn't quite like the mindblowing year-over-year increases we've been used to, but definitely solid stuff.

Drilling a little deeper, though, we see a potentially worrisome number: 25% of Ford's U.S. sales in July -- 41,411 vehicles -- were to fleets. Year-to-date, a whopping 34.5% of Ford's U.S. sales were fleet sales.

Many analysts will tell you that big fleet sales numbers are bad news. Should Ford investors -- full disclosure: I'm one -- be worried?

Detroit's dirty little secret
Here's why fleet sales have historically been considered a problem: They're low-margin, and in many cases, they've been made to more-or-less captive audiences, rental-car companies and government agencies who are more-or-less obliged to buy from Detroit automakers. Rental-car lots in particular have tended to be seas of Detroit Big Three products: Hertz (NYSE: HTZ  ) has long been associated with Ford (which actually owned Hertz between 1994 and 2005), just as Avis (NYSE: CAR  ) has been with General Motors, and Dollar Thrifty (NYSE: DTG  ) which spun off from Chrysler in 1997.

In other words, the argument goes, Ford -- and the other Detroit automakers -- might not be making those sales on the competitive strength of its vehicles, and so the sales numbers might not accurately reflect the company's competitive position -- or its financial position, given that fleet sales are thought to be low-margin.

But at the same time, those rental companies need vehicles -- as do police departments and government agencies and airport-taxi services and all of the other buyers who get lumped into the "fleet" category. Should Ford and the other automakers look to forego these sales?

There are fleet sales, and there are fleet sales
After July's numbers came out, Ford was at pains to point out that their fleet sales aren't like the other guys' -- a Ford analyst told Automotive News that "Ford is emphasizing commercial and government fleet sales — generally considered more profitable than sales to daily rental fleets. Sales to daily rental fleets are less than half of Ford's fleet total this year."

"Less than half" sounds like meager reassurance, but compare that to roughly two-thirds at GM and Chrysler. And make no mistake, this is mostly a Detroit issue -- while 16% of Hyundai's year-to-date sales were to fleets, that's only enough for a distant fourth behind GM at 31%. (Starved-for-new-product Chrysler's were a whopping 39%.) Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) check in at 9% and 2%, respectively.

On the other hand, when's the last time you saw a Honda police car? Ford's iconic (albeit recently discontinued) Crown Victoria's are everywhere, and more and more police departments are adding speedy Dodge Chargers and also various GM products to their fleets. These may not be super-high-margin sales, but they're profitable ones -- profitable enough that GM is introducing a new police sedan of its own next year to try and capture a larger piece of the black-and-white pie.

The upshot
Ford is obviously trying to distance itself from the perception that it has been using low-margin sales to rental fleets to pad its sales numbers -- and in truth, that was probably an unfair perception in the first place. Part of the reason fleet sales have been up in 2010, after all, is the obvious one -- like sales of everything else, they were way down in 2009.

All three of the Detroit automakers have said that they expect fleet sales to represent a smaller percentage of their totals in the second half of the year -- Ford expects its number to be around 30%, GM and Chrysler are saying 25%. And I think anyone who expects them to go much lower is probably being unreasonable: Should the automakers really turn away paying customers?

One last thing to ponder: While rental-fleet sales may not be the most profitable in the world, consider them an opportunity to change perceptions. While many of Detroit's products are (finally!) getting up to world-beating standards, lots of folks don't realize that yet. I think a lot of habitual foreign-car buyers who happen to rent a Chevy Cruze or a Ford Fusion on their next business trip might find themselves pleasantly surprised -- and that can only help Detroit's turnaround.

Read more Foolish coverage of the global automotive shakeout:

Fool contributor John Rosevear owns shares of Ford, which has been a Motley Fool Stock Advisor selection since late 2009. You can try Stock Advisor or any of our Foolish newsletter services free for 30 days, with no obligation. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 23, 2010, at 3:55 PM, Brent2223 wrote:

    Fleet sales have a couple more potential landmines, i) are there any guaranteed buy-back arrangements, if so the 'low margin' is quickly more than offset by residual losses, and ii) regardless of the above, fleet sales to rental companies tend to flood the resale market with late model vehicles lowering resale values, eat away at new car sales, and further compound residual pricing issues. There are too many North American cars on the road as is, flooding the market is just pushing the problem out a few more years. I've seen fields of cars returned by rental companies, just sitting for months as the manufacturer is afraid to intorduce into the market. I wouldn't touch the auto sector with a 10 foot pole right now, especially Detroit.

  • Report this Comment On August 23, 2010, at 4:59 PM, plange01 wrote:

    fords numbers dont really matter with the auto industry starting a far worse downturn than last year...

  • Report this Comment On August 23, 2010, at 6:27 PM, gscott12 wrote:

    Do controversial headlines get more attention???

    Yes, but it does not necessarily make the analysis better.

    1) Ford has had about 20-30% fleet sales for several decades so having a 24% fleet mix this year should not be anything surprising.

    2) Yes, fleet sales are generally less profitable than retail sales, but there is a big difference between the type of fleet sale. Daily Rental units are often contractually returned to the manufacturer within 2 years, creating a flood of newly-used product that hurts residual values making it harder to attract more retail customers (a bad downward spiral.) Ford has been limiting sales to daily rentals for this very reason.

  • Report this Comment On August 23, 2010, at 9:14 PM, HectorLemans wrote:

    For what it's worth, I'm an engineer with Johnson Controls (JCI) and just got my new company vehicle - a 2010 Ford Escape Hybrid. It's awesome! I know JCI purposely switched to Ford for their company vehicles because they wanted a good hybrid from a financially strong auto company, so at least in this case Ford is making in-roads in the commercial fleet business.

  • Report this Comment On August 24, 2010, at 9:04 AM, SMOKEN42 wrote:
  • Report this Comment On August 24, 2010, at 9:41 AM, SMOKEN42 wrote:


  • Report this Comment On August 24, 2010, at 1:19 PM, Ivan0310 wrote:

    @SMOKEN42 You might also want to remember that there is a large stigma still associated with Ford due to the Crown Victoria Interceptor's issues which have caused numerous police departments to dump them instead for Chevy Impalas and Dodge Chargers. Ford's prominence in that market will probably be lower for quite some time due to this.

    @Rosevear I think you may have a point with the fact that business people renting cars purchased from Detroit may well find themselves pleasantly surprised by their offerings now-a-days. I am quite proud of my Fusion and will defend it to the death in terms of its quality and performance. And in the end, no, I don't think it prudent for any company to turn away such a large market of paying customers.

  • Report this Comment On August 24, 2010, at 2:51 PM, lctycoon wrote:

    @Rosevear - While you absolutely may be right about fleet sales to rental companies improving the image of the company, they can also have the exact opposite effect. My last two rentals were both Chevrolets (one was a Malibu and the other was an Equinox), and both were complete and utter garbage. Since both vehicles were highly acclaimed, I was hoping for something decent, but both cars (2010 models) were drastically worse than my old 1999 Subaru. They both lowered my perception and made me even less likely to consider purchasing a vehicle from them.

  • Report this Comment On August 24, 2010, at 9:33 PM, baldheadeddork wrote:



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