The battle between the Chevy Silverado from General Motors (NYSE:GM) and the Ford (NYSE:F) F-150 has been heating up lately, with GM trying to challenge Ford's long dominance atop the best-selling vehicle list. But despite some concerns about the Silverado launch, GM recently got some good news that could help give it an edge against Ford and its other competitors.
Research company ALG made its forecast for projected residual values for full-sized pickup truck lines earlier this month, and its figures for GM's biggest truck lines were unexpectedly strong. ALG projects that 2014 Silverados will retain 55% of their value after 36 months, compared to just 47% for the 2013 model. That forecast also puts the Silverado ahead of its most important rivals in the segment, including the F-150. ALG found that only Toyota's (NYSE:TM) Tundra weighed in with slightly better residual values.
To understand why the boost in residual value represents an important edge, you need to understand the basics of vehicle leasing. In essence, higher residual values give GM a lot more flexibility in offering attractive deals for customers who want to take home a Silverado as inexpensively as possible.
Vehicle leasing 101
From the customer's perspective, leasing rather than buying can be an attractive way to drive a new vehicle every few years. With a typical lease, you'll pay a fixed monthly payment as well as some upfront costs. After the lease term expires, you typically have the option either to purchase the leased vehicle or to return it in favor of buying or leasing a newer car or truck.
But from the automaker's perspective, the economics of the lease are much different. In deciding where to set monthly lease rates, automakers have to look at two things: the value of the brand-new car on the lot and the amount of money they'll be able to get for that car at the end of the lease term, when the dealer sells it as a used car. The greater the difference between full retail price and the residual value at the lease's end, the more an automaker has to charge on lease payments in order to recoup the loss in value and make a profit. Conversely, greater residual value boosts profit margins on leases, giving an automaker the latitude to offer more attractive lease terms.
Historically, GM hasn't had many customers interested in leases. Leases make up less than 10% of GM's sales of the Silverado and the GMC Sierra, according to a recent article in Automotive News. With the Sierra also having seen a big jump in residual value for its 2014 model year, though, the potential for greater use of leases could enable interested buyers to stretch their budgets and grab up better-equipped versions of the Silverado and Sierra.
Deciding on a lease
Of course, your own personal situation will determine whether it makes sense for you to lease a Silverado or other vehicle. In making your decision, you'll want to consider several things. Leases impose mileage limits, and if you expect to drive more than those limits cover, you'll end up paying quite a bit more in overage fees. Also, fees for excessive wear and tear can add quite a bit to your total cost, and hefty early termination fees are required if you change your mind about the vehicle and want to get out of your lease before it expires.
But for investors in GM, the good news is that more attractive lease options for its premier pickup lines could help drive more customers into showrooms, letting the stock continue its recent strong performance. As competition gets ever fiercer in the pickup market, having the advantage of strong resale value will give GM more flexibility in giving potential customers every chance possible to drive away in the Chevy Silverado they truly want.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. 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.