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Are Ford's Sales Numbers Inflated?

By John Rosevear - Updated Apr 6, 2017 at 11:01AM

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Fleet sales are a big part of Ford's surge. Should shareholders be concerned?

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.

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Stocks Mentioned

Ford Motor Company Stock Quote
Ford Motor Company
F
$15.30 (-0.46%) $0.07
Honda Motor Co., Ltd. Stock Quote
Honda Motor Co., Ltd.
HMC
$25.02 (-1.34%) $0.34
Toyota Motor Corporation Stock Quote
Toyota Motor Corporation
TM
$157.31 (0.41%) $0.65
Hertz Global Holdings, Inc. Stock Quote
Hertz Global Holdings, Inc.
HTZG.Q

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