Why Chrysler's Ram Could Lose to GM's Chevy Silverado

Ram sales have been booming, but that could change soon -- and GM could benefit.

Aug 3, 2014 at 2:32PM

Rm

Sales of Chrysler's Ram pickup line are up 19% so far this year. But a change in strategy could trim Chrysler's gains soon. Source: Fiat Chrysler.

Could a decline in Fiat Chrysler's (NASDAQOTH:FIATY) earnings because of problems in Latin America spell trouble for Ram pickup sales in America?

Let's start with the big picture. Fiat Chrysler reported a sharp decline in second-quarter earnings on Wednesday as economic weakness in Latin America offset improved performance in Europe and Asia.

FCA reported a net profit of 197 million euros ($264 million) for the quarter, a sharp drop from the 435 million euro profit it reported in the year-ago quarter. It also fell far short of the Wall Street consensus estimate of 282 million euros, as reported by Reuters.

So, what do FCA's Latin America troubles have to do with Ram pickups? Read on.

FCA needs to make more money in North America, now
Although Fiat shareholders officially voted to approve the merger on Friday, and there's still some paperwork to be done before it's really official, Fiat and Chrysler have effectively been run as one company for a while. 

That means CEO Sergio Marchionne takes a global view of his entire organization. And while he has to like the sales growth he has seen from the company's operations in North America -- sales were up 7% in the second quarter -- the profits it has been making aren't as solid as he would like.

Just as we've seen at rival Ford (NYSE:F), where strong North America profits have carried the Blue Oval while it restructures in Europe and expands aggressively in Asia, profits at Fiat Chrysler's North American division -- essentially, the Chrysler Group -- have helped it withstand the severe challenges faced by the Fiat side of the business in Europe and Latin America.

But even though sales in North America were up, FCA's profits in the region were down 18% in the quarter.

Why? Because Chrysler has been winning big sales gains with discounts. But FCA needs profits more than sales because of its problems elsewhere in the world.

So now, the boss wants to cut those discounts way back.

Sales are up while profits are down? Here's why.
Ram pickups are Chrysler's best-selling product in the U.S., and Ram sales have been great: up 20% in the first half of 2014, versus a 1.1% gain for General Motors' (NYSE:GM) Chevy Silverado and GMC Sierra twins, and a 0.5% decline for Ford's F-Series line.

But profits haven't been great, because Chrysler has been winning those sales (and others) with big incentives. According to data from TrueCar, Chrysler's average incentive payout has risen past those of its Detroit rivals over the last few months. (The three Detroit automakers tend to pay higher average incentives than other manufacturers because of their big sales of full-size pickups. Big payouts are typical in that market segment, where the average payment often exceeds $4,000 -- but despite the payouts, pickups are among Detroit's most profitable products.)

Detroit

Data provided by TrueCar shows each manufacturer's average incentive payment per vehicle in the U.S. for the specified month. July numbers are TrueCar estimates. 

In a conference call for analysts following Wednesday's earnings report, Marchionne and CFO Richard Palmer were both clear: Profit margins in North America have to improve in the second half of the year, and to get that improvement, incentives and discounted leases in North America could well be rolled back.

That could bring Ram sales back to earth in a hurry. 

Why GM could be the big winner here
Ford isn't in a position to pick up (so to speak) a lot of truck sales right now. The Blue Oval is winding down production of its current F-150 before the launch of its all-new 2015 model late this year, and supplies of its mainstay pickup are expected to be tight as the year goes on. 

But General Motors, with ample supplies of its new-for-2014 pickups on hand, could be in a position to steal back the market share it has lost to the Ram over the last year. GM has tried to be conservative with its pickup incentives in an effort to boost its own profit margins in North America.

That effort has paid off for GM so far -- but a cutback by Chrysler could spur the General to try to make a big move. Stay tuned.

John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers