On the surface, General Motors (NYSE:GM) and Ford Motor (NYSE:F) have gone in opposite directions in the critical U.S. market this year. Ford has posted strong sales all year, with deliveries up 5% year over year through the end of June. Its growth was driven by the Ford F-150 pickup, commercial vans, and Ford's popular lineup of SUVs and crossovers.
Meanwhile, General Motors has delivered significantly fewer vehicles in the U.S. this year than it did in the first half of 2015, punctuated by an 18% decline in May. This was driven by a strategic decision to reduce sales to rental car companies.
While GM and Ford have adopted opposite strategies this year -- rental car sales are up year to date at Ford -- both automakers have been extremely successful. This was highlighted by GM's record Q2 adjusted operating income of $3.9 billion.
GM silences the critics
Many auto industry pundits have expressed concerns about GM's sales declines and falling market share in the U.S. However, GM's retail deliveries actually increased 1.3% year over year in the first half of 2016. The vast majority of the total sales decline can be attributed to low-margin daily rental fleet sales.
As a result, General Motors is posting extremely strong margins in North America. In Q2, its adjusted segment operating margin was a stellar 12.1%, up from 10.5% a year earlier and 8.7% in Q1. Over the past four quarters, GM has averaged a 10.7% adjusted operating margin in North America, comfortably above its 10% target.
Furthermore, GM's subpar sales performance this year has been caused in part by tight supply. The biggest shortages have affected the popular Chevy Colorado and GMC Canyon midsize pickups, but full-size trucks and crossovers have also been in short supply for much of the year.
General Motors is already addressing this issue. In fact, GM's wholesale unit sales in North America topped 1 million last quarter, while sales to end users came in at about 910,000 units.
As a result, dealer inventories are starting to improve in North America, rising from 631,000 units at the beginning of 2016 to 707,000 by the end of June. Yet dealer inventories are still down about 2% year over year. This could lead to stronger retail sales growth in the second half of the year.
Ford is in good shape, too
Thus, GM's strategy of reducing sales to rental car fleets appears to be paying off. However, Ford is also thriving, even as it continues to sell a large number of vehicles to rental car companies.
Leading up to Ford's Q1 earnings report, some analysts -- including myself, to some extent -- were concerned that high sales to the daily rental industry could crimp Ford's profit margin. Instead, Ford's North American operating margin reached 12.9% in Q1, up by 5.1 percentage points from the first quarter of 2015.
While there was undoubtedly some margin pressure from rental car sales during Q1, Ford benefited from very strong sales of its most profitable vehicles, especially the F-150.
That bodes well for Ford's upcoming Q2 earnings report. While sales growth has cooled a bit for Ford's crossovers, SUVs, and commercial vans, pickup truck sales remain red-hot. In Q2, Ford averaged monthly sales of nearly 70,000 F-Series trucks in the U.S., posting sales gains of 13%, 9%, and 29% in April, May, and June, respectively.
General Motors and Ford have shown through their strong results this year that there are multiple paths to success in the auto industry. Both auto giants are sticking to their guns -- and so far, they have proven all the doubters wrong.