Are Ford's Sales Improving?

Are auto sales picking up?

It's a question that many have been asking for a while, but recent signs suggest that an upturn may be under way. That would be a good economic sign, and not just for well-positioned automakers like Ford (NYSE: F  ) : A rise in spending on big-ticket durable goods like autos is generally seen as a sign that consumers are feeling more optimistic about their prospects -- and likely to start spending more on other things besides new cars.

Auto sales in the U.S. (and in many other parts of the world) have been well below recent historical norms ever since the economic crisis of 2008. A trend back toward those levels would be a strong sign that household "deleveraging" had run its course and that consumers were ready to start spending -- and taking on debt -- once again.

That would be welcome. So is it happening?

A strong result -- but with an asterisk
Auto sales were up 11% in January versus year-ago numbers, enough to put the "SAAR" -- for Seasonally Adjusted Annualized Rate, a widely watched indicator of the pace of auto sales -- at 14.1 million. That's the highest monthly level seen since August 2009, when auto sales boomed briefly as a result of the government's "Cash for Clunkers" stimulus program.

That number came with a big caveat, though. Fleet sales were up significantly, at 24.1% of total sales (versus a more typical 20%-21%). Fleet numbers were quite high for many automakers, including both General Motors (NYSE: GM  ) and Ford, at 30% and 29% of their January totals, respectively. That's a concern: Historically, fleet sales were a way for the Detroit automakers to keep production running at artificially high levels. Sales to fleets -- governments, businesses, and (most often) rental-car companies -- tend to be seen as low-margin sales to somewhat captive audiences, and thus less desirable (and a less-reliable indicator of competitiveness) than retail sales.

Ford and GM have both said that their long-term goal is to keep fleet sales below 25%, and both said that they expect fleet sales to return to that level as the year goes on. But other automakers saw high fleet numbers in January as well: Nissan's (OTC: NSANY.PK) were 35% of its U.S. total, and normally fleet-averse Toyota (NYSE: TM  ) saw fleet sales rise to nearly 20%.

It's not uncommon for fleet sales to rise early in the year, say analysts. But that raises an obvious question: If January's sales gains were driven by a blip in fleet sales, does that say anything good about the prospects for sales going forward?

But retail sales may be gathering strength
Edmunds' Jeremy Anwyl thinks there might be cause for (cautious) optimism. Reports collected by Edmunds analysts suggest that the retail SAAR -- the annualized total of cars and light trucks sold at retail, versus to fleets -- is on track to finish February at 11.2 million, up from January's 10.7 million. According to Anwyl, even if we assume a "normal" fleet number around 21%, that's high enough to put the total SAAR around 14.2 million.

That would represent a significant upturn. Last year's sales total came in 12.8 million, though the pace increased significantly toward the end of the year -- the SAAR was 13.56 million in December. While still short of the 16-million-plus pace seen routinely before the economic crisis, a SAAR above 14 million would still represent good news for economy-watchers.

Anwyl's numbers also have some potential good news for Ford shareholders -- Edmunds sees the Blue Oval's retail market share up about 4% so far in February. Ford's sales were up about 7% in January, trailing the overall market's gains a bit as a resurgent Toyota pushed hard to make up ground lost in 2011, and as I mentioned, a good chunk of that gain was attributable to fleet business.

Edmunds says Toyota's retail market share is so far essentially flat in February, and Honda's (NYSE: HMC  ) may actually be declining. If that holds, and Ford does show a gain, that will be a very positive result for the Blue Oval. We'll know more when numbers are released next week. Stay tuned.

Ford's long-awaited dividend will be back in March and could increase in time as the Blue Oval's sales rise -- but you don't have to wait to put the power of reinvested dividends to work in your portfolio. In a special new report, Motley Fool analysts identify "11 Rock-Solid Dividend Stocks," all great additions to a long-term investor's portfolio. This report is completely free for Fool readers -- get instant access.

Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors, as well as creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On February 22, 2012, at 1:26 AM, garifolle wrote:

    Interesting analysis.

    Do I share the cautious optimism?

    I must say that I am "cautiously" pessimistic:

    To compete successfully, Ford needs to sell more, not only in the US or North America, but globally too.

    And this was (in my opinion) the reason that Ford went down after its last results.

    As I have often written, but never received refutation, my impression is that:

    1. In Asia,the competition is not favorable to Ford at all.

    2. In Europe, short and middle term do not seem very promising, and there will be a tendency to buy home production if there is any.

    3. And what for America? Ford has very attractive models, priced mainly for a middle class that is shrinking: to expensive for the poor, to "cheap" for the 1%.

    Corporate America has eaten the Golden Eggs Goose.

    Next week numbers will report sales in the US.

    ".. if Ford does show a gain, that will be a very positive result for the Blue Oval"

    I would take off the word "very".

    Please someone, tell me that I am wrong.

  • Report this Comment On February 22, 2012, at 8:58 AM, TMFMarlowe wrote:

    @garifolle: My bull argument for Ford in North America isn't really predicated on gains in market share. They'll get some more, over time, as their higher quality message starts to resonate more deeply with TM/HMC loyalists etc. But it's really predicated on holding share during a period of overall growth in the US auto market as households complete deleveraging and start buying more cars and trucks.

    The bull argument for Ford in Europe is similar, except that Europe is in a bigger hole and VW is a big aggressive player they'll need to joust with. But the Focus and Fiesta are doing fine, and the new Mondeo (aka Fusion) looks like a potential hit.

    The bull argument for Ford in Asia has a couple of big parts. In China, Ford's a late arrival - but they are spending big to increase production capacity by mid-decade. If their global product line competes well against GM/VW/TM everywhere else, it will do well in China where the market is more fluid and brand loyalties have yet to be entrenched.

    In India and Russia, it's early days for the auto markets, but Ford is already established and has a vehicle or two among the top sellers. As those markets mature, Ford has a good shot at finding growth.

    This is of course way oversimplified, but I think it all adds up to a compelling bull case, assuming the economies cooperate.

    Thanks for reading.

    John Rosevear

  • Report this Comment On February 22, 2012, at 10:51 AM, alexanderantonio wrote:

    @garifolle:

    I wouldn't say you are wrong persay, you raise a couple of good points.

    But lets take a step back and look forward to the year to come. Obama wants to get reelected, and if there is one thing that he is relying on, it's the economy to start picking up and doing better (which it will, he needs it too and the economic news this year WILL be positive). As well Obama has rested his hat on GM's success and will continue to do so as elections really start to pick up. This means that our currency will continue to be inflated vs. Asian currencies. Which means that as the Government continues to try and help GM's sales overseas by inflating our currency making our products cheaper and their products more expensive, Ford too will ride that wave. That's why Toyota, Honda and Nissan are all struggling even though they are cranking out (in my opinion) nicer, more advanced and sleeker cars than the US.

    Ford expects positive growth in China this year, and in relation to you comment about middle class... Ford trucks are actually sold to the Upper Class, and most GM commercials are mentioning Ford trucks (ie, those are the trucks they are afraid of).

    Europe doesn't look good, I'll give you that. But they will always need cars, and Ford is turning out more and more small, fuel efficient cars. So even if in the short-run Europe they don't do great, they will succeed in the long run...

    Also-dividend coming soon. Get ready for this stock to hop.

  • Report this Comment On February 22, 2012, at 12:04 PM, jdwelch62 wrote:

    It was also my understanding that Ford was focusing on bigger margins (that is, more profit per car) moreso than on increasing market share. I'd read an artilce (I think on the Fool) that indicated that Alan Mullaly is more concerned about profitability of each car sold than he is about gaining significant market share. This approach "bucks the trend" of offering insane insentives that cut deeply into profits just to gain more profit share, and is one of the reasons I'm very bullish on Ford. I'm watching their margins and profits more than market share...

  • Report this Comment On February 22, 2012, at 1:19 PM, garifolle wrote:

    Thank you all for your reactions to my post.

    I have been thinking the same for a while and writing it on many forums, and it is the first time that I get feedback.

    I'll weight your arguments, but I am not a long time holder, I do not have a big enough US$ portfolio that would allow me to hold and wait (my main portfolio is in CND$). So before I jump in, I will certainly wait sometimes, to the risk of missing the beginning of a new upward trend.

    Thanks again.

  • Report this Comment On February 22, 2012, at 10:15 PM, baldheadeddork wrote:

    "Historically, fleet sales were a way for the Detroit automakers to keep production running at artificially high levels. Sales to fleets -- governments, businesses, and (most often) rental-car companies tend to be seen as low-margin sales to somewhat captive audiences, and thus less desirable (and a less-reliable indicator of competitiveness) than retail sales."

    John, the first part of that paragraph hasn't been true in any form for years. Back in the 90's all of the US automakers owned rental companies and they did shove cars into their rental subsidiaries to boost sales numbers. But that ended in 1995 for GM (selling National), 1997 for Chrysler (spinning off Thrifty/Dollar) and in 2005 for Ford when it sold Hertz. (Ford stopped shoving cars into Hertz about ten minutes after they fired Jacques Nasser in 2001.) Today none of the US automakers even have a preferred vendor arrangement with a rental company. There is no more "captive" fleet customer, period.

    The claim that fleet sales "most often" go to rental companies is just ridiculous. Are you saying that rental car companies buy more cars every year than either the total purchases of local, state and federal governments, or the rest of the private sector combined? I call BS. Sales to rental companies have never composed a majority of fleet sales.

    Now about fleet sales "being seen" as low-margin and less desirable, as investors who the hell cares about how something is seen? Where are the numbers?

    Fleet sales alone is a meaningless statistic. What's the state of the fleet market? Used car values continue to rise, which means the net cost of replacing current vehicles is low and a lot of operators have units that are a couple of years past their normal sell date. That's going to be an incentive for fleet operators to move if they have the money and they're feeling more confident in the economy, which is happening. The cash hoard among public companies is well documented and it's likely that a lot of private companies are flush, too, or at least in a stronger position than they've been in since 2008.

    About confidence, look at private sector hiring. There is no better barometer for business confidence and it's up and growing at a pretty good clip. Also, the ISM purchasing managers report is looking really strong. Everything points to a fleet market where buyers are calling the automakers, not the other way around.

    Next, if these fleet sales are so bad, shouldn't it be reflected in the average transaction price, revenue or earnings numbers? Let's look at the 2011 report released a couple weeks ago and...they're really good. The average wholesale transaction price for Ford NA (which includes fleet sales) was up 4.6% in 2011 and pre-tax profits per vehicle were up 2.8%.

    Repeat that: In 2011, unit sales in North America were up 12.6%. The average wholesale transaction price rose from $26688 to $27922, and the profit per vehicle rose from $2241 to $2304 - all of this despite higher material costs and a new labor contract.

    But wait - let's go back to before the crash. Ford was selling a lot more cars five years ago, 400,000 more than they sold last year. But the improvement in the average transaction price has been so great that they had more revenues last year. In 2011 they made 400,000 fewer cars than they sold in 2006 but they collected five billion dollars more. The average transaction price for all North American sales - including Fleet - has risen 22.7% in five years.

    So yes, you can definitively say that defying decades of crusted-on assumptions, Ford is making more cars and making more money on them, even though a lot of those cars are being sold to fleet customers.

    Fleet sales can be bad or they can be good. Right now everything single data point indicates the balance is tipped in favor of the manufacturers.

    Want more? It's just as wrong to assume that retail sales are always more profitable. Take the Mustang for a real world example. It's fleet market is miniscule, so Ford has to depend on the retail market for practically all of the sales. If there isn't enough native demand for what the factory can produce, Ford either has to keep the plant running at optimum efficiency and spend a lot more on marketing and incentives, or they can slow production to match demand and take big losses in labor and operational costs. Either way they could make a lot more money on the Mustang if there was a larger fleet market.

  • Report this Comment On February 23, 2012, at 3:31 AM, garifolle wrote:

    @ baldheadeddork

    Wow, this was an interesting post.

    One question about fleet:

    Comparing to 10 or even only 5 years ago, do big companies and other services have the same needs now that they had then?

    I just think about the postal services. I guess they used to have much bigger fleets then now.

    Are there any statistics on the trend of fleet renewals?

  • Report this Comment On February 23, 2012, at 8:11 AM, baldheadeddork wrote:

    I think RL Polk tracks fleet registrations, but I don't have access to that data.

    Remember when you're talking about fleet, you're not just talking about companies that buy cars by the thousands directly from the manufacturer. Your local plumber who has twelve vans and two or three sedans bought from a local dealer counts as fleet sales, too. Ditto for local government purchases. State and large metro police departments might buy directly from the manufacturer, but everyone else puts out a request for bids from local dealers.

    The manufacturers only discount these sales slightly, if at all. Fleet sales might be lighter on options but that isn't always the case. The manufacturers have become really good at creating options designed for fleet customers to claw a lot of that back, and smaller customers are taking them because it's less expensive to have the factory install that equipment than to buy it in the aftermarket and have it installed. (Also, fleet doesn't equal the least expensive car in the range. The invoice price on the base 2011 Charger police edition was $28,000. That's $2500 more than the base civilian edition.)

  • Report this Comment On February 23, 2012, at 11:33 AM, baldheadeddork wrote:

    (Correction in the last post. It should read "fleet doesn't have to equal the least expensive car in the range." Also, the invoice price on the 2011 Charger police was $3500 more than the base civilian edition. Need more coffee.)

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