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Why Ford Motor Company Investors Should Take Strong Sales With a Grain of Salt

By Daniel Miller - Apr 3, 2016 at 1:00PM

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No doubt Ford's sales, especially highly profitable SUVs and trucks, were robust throughout the first quarter of 2016, but fleet sales did play a role.

Ford's 2017 Escape Titanium trim. Image source: Ford Motor Company.

The general theme for the automotive industry is that sales are peaking in the U.S. market, but don't tell Ford Motor Company (NYSE: F) that.  The folks at the Blue Oval kept on trucking through the first quarter of 2016 and just posted their best U.S. sales in a decade in March -- and the company's best first-quarter sales results since 2006. Let's dig into the details and why investors might want to take these results with a grain of salt.

Grain of salt?
From the 10,000-foot view, Ford's March looked great. Sales in the U.S. were up 8% for the month to 254,711 units, compared to last year, and the first quarter was up 9% to 645,626 units. Those are solid results, no doubt, but investors do need to consider the impact that fleet sales are currently having, though Ford notes it should taper off significantly during the second half.

During March, 37% of Ford's total sales were from fleet segments. Now, not all fleet sales are created equal. Commercial and government sales are healthy, valuable, and highly competitive sales between automakers. Daily rental fleet sales, however, are typically associated with slimmer margins and are less desirable. Ford's 37% fleet sales, of total sales, breaks down to 14% for commercial, 6% for government and 17% for daily rental. For comparison, last March Ford's fleet sales accounted for 29% of its total sales with 12% commercial, 5% government and 12% daily rental.

Backing out a little bit and viewing the first-quarter figures, rather than only March data, fleet accounted for 36% of total sales this year compared to 29% last year. This year's 36% breaks down into 13% commercial, 6% government, and 17% daily rental compared to last year's 13%, 5% and 11%, respectively.

The takeaway from that is that Ford's fleet sales were up significantly and those sales were of the less desirable rental segment. Now, as previously mentioned, Ford has noted multiple times that these figures are going to be inflated during the first half of the year due major customers wanting the vehicles sooner. To get a better idea of what these figures mean, let's look at a rival automaker.

How does GM compare?
Ford's hefty increase in fleet sales was the complete opposite of crosstown rival General Motors (GM 4.00%), whose retail deliveries were up 7% during the first quarter, while total deliveries were flat compared to last year, mostly because of a drop in fleet sales, which were down 5.2 percentage points and accounted for only 21.5% of GM's first-quarter sales -- compared to Ford's 36% of total first-quarter sales.

Furthermore, that decline in fleet sales was due to a significant drop in less desirable rental fleet sales, not the healthier commercial or government business. Consider that GM's commercial and government fleet sales were up 9% and 23%, respectively, while its daily rental sales were down about 36%.

Typically, Ford and GM are such fierce rivals that their strategies are often similar. For that reason, I think Ford investors should restrain from panicking after only the first quarter of fleet sales data. In my opinion, Ford's fleet sales will close the gap on GM's fleet sales percentage toward the end of the year.

That said, investors have to take Ford's strong sales start to the year with a grain of salt, and if these fleet gains don't taper off significantly during the third and fourth quarters, analysts will be raising red flags. It's something to watch but nothing to worry about just yet. 

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