Last week, U.S. automakers reported their domestic sales results for the month of May. Surprisingly, perennial market leader General Motors (NYSE:GM) ceded the top spot to longtime rival Ford Motor (NYSE:F) last month.
At first glance, this may seem like a big deal. However, there's less here than meets the eye. Ford's "victory" was driven entirely by the timing of low-margin sales to rental car companies.
Ford sneaks in ahead of General Motors
In recent years, General Motors has had a comfortable market share lead over Ford in the domestic market. During 2016, GM delivered 3.04 million vehicles in the U.S., compared to 2.61 million for Ford. GM's advantage was even bigger in 2015.
By contrast, Ford outpaced the General by 1.6% during May. Ford delivered 241,126 vehicles in the U.S. last month, up 2.2% year over year. Meanwhile, GM delivered 237,364 vehicles, down 1.3% from a year earlier.
The big highlight in Ford's May sales performance was a 12.8% jump in F-Series deliveries. Ford sold more than 76,000 F-Series trucks during the month, which was its best May performance since 2004. The company also posted solid growth in SUVs and in the upscale Lincoln brand, offset by another big decline in car sales.
It's all about daily rental
For the past couple of years, General Motors has made it a priority to reduce its sales to rental car companies. These sales tend to carry low margins. Furthermore, rental car companies typically keep vehicles for just a year or so. After that, the vehicles typically hit used car lots, potentially pulling down resale values for other owners of the same model.
Last month, GM had an unusually large 36% decline in deliveries to rental car fleets. Meanwhile, Ford recorded an increase in sales to rental car companies. Both automakers noted that fleet sales tend to be "lumpy," and that the May numbers aren't reflective of the full-year trend.
In any case, this divergence in sales to rental car companies was the difference-maker that gave Ford the U.S. sales crown last month. Looking just at retail sales, GM delivered 191,388 vehicles in May (up 0.4% year over year), compared to 158,282 retail deliveries for Ford (down 0.8% year over year).
General Motors achieved this strong retail sales performance without needing to ramp up its incentive spending. It also reported double-digit increases in commercial and government fleet deliveries. Those segments tend to be more profitable than sales to rental car companies.
GM is still in better shape -- with one caveat
Last month, I noted that General Motors has become significantly more profitable than Ford recently. This seems to be primarily a cost issue. Ford has been outperforming GM in the lucrative full-size pickup market in the past year or so, yet GM has maintained a meaningful margin advantage.
The two companies' domestic sales results for May don't point to any fundamental change on the margin front. Ford continued to outpace GM in the full-size pickup market, but low-margin fleet sales were the main reason it overtook General Motors in terms of total sales.
However, there is one way in which Ford is in better position than General Motors. After making a heroic effort to reduce its inventory last year -- particularly for cars -- Ford ended May with a healthy 72 days of sales in inventory. By contrast, GM ended the month with 101 days of inventory.
GM executives have repeatedly assured investors that the recent increase in inventory is needed to support planned downtime related to new products in the coming months. Still, GM's bloated inventory means it would have to drastically cut production in the event of a sales downturn later this year. That's one risk Ford shareholders don't have to worry about right now.