Four Reasons Why Truck Sales In The U.S. Might Increase In 2015

Ford Motors (NYSE:F) will release an updated version of its best-selling F-150 truck for the year 2015. The new truck will have several changes compared to the earlier versions, including new engine options and an aluminum body. For the production of the new model, Ford invested more than $800 million at its Rouge center assembly plant and nearby Dearborn parts facility. ^[1] Another $1.1 billion is being invested at Ford’s Kansas City facility in Missouri, where the company will cease the production of the current F-150 and close operations for a month around Christmas for the production of the new truck. ^[1] Together, the two facilities are expected to produce 700,000 units in a year.

The use of aluminum in the vehicle manufacturing process isn’t exactly novel. Ford itself has used aluminum in the manufacturing of lower volume models. The Ford GT used an aluminum frame space and body panel for a number of years. Other companies have used aluminum in their vehicles for years. The Jaguar XJ has used an aluminum uni body structure for about a decade, while Audi has manufactured about 750,000 vehicle units which use aluminum in their body parts in the 20 years over which they have used aluminum in their production process. However, the scale at which Ford plans to produce vehicles with aluminum bodies is unparalleled. Moreover, it is highly unlikely that consumers will purchase the new F-150 model just because of the new aluminum body. The obvious impact of the use of aluminum in the manufacturing process will only be to raise the cost of production of the car, since aluminum is at least two and a half times more expensive than steel. If the company decides to pass the higher cost of production onto the consumer, the average unit price of the F-150 will increase. Higher unit prices also mean higher insurance costs, and this is something consumers are quite likely to factor into their decision making process. The cost savings on fuel and maintenance will have to be greater than the increase in unit and insurance costs in order to sway the consumer.

Trucks are money makers for automotive companies as truck models are high-volume and high-margin. The current economic environment is set up in  such a way that the pickup truck segment can become even more valuable. There are four main reasons for believing this:

1) A recovery in construction demand will also increase the demand for hauling vehicles: According to the builder’s confidence index, confidence among U.S. home builders is at a nine-year high. ^[2] The housing market in the U.S. has gradually improved this year, helped by a drop in mortgage rates below 4 percent and a drop in unemployment levels to a six year low. Additionally, wages have picked up in real terms and gains in consumer sentiment are likely to support the continuation of this momentum into the next year and beyond. As builder confidence increases and more houses, institutional developments, and major infrastructure projects are brought into existence, the demand for construction related equipment also increases. Hauling vehicles, such as pickup trucks, form a significant part of this ancillary industry. Consequently, we can expect an increase in pickup truck sales over this period.

2) The decrease in gas prices supports truck sales: Gasoline prices have declined by over 20% through the course of this year, as a result of the global collapse in oil prices. ^[3] Cheaper gasoline is good for the pickup truck industry and the decline in gas prices has seen the sales of SUVs, crossovers, and pickup truck sales increase over the course of this year. In the month of November, pickup truck sales increased by more than 10% compared to last year, while SUV sales increased by 10.3%, and crossover sales increased by 9.5%. ^[4] On a year-to-date basis, total SUV and crossover sales have increased by as much as 11.7%, while pickup truck sales have increased by 5.4%. ^[4] It is difficult to know just how long low gas prices will persist and how long consumers expect them to persist. This is dependent on the economics of oil and on geopolitical considerations but as long as gas prices stay low, the sales of these categories in the auto industry are likely to keep going up.

3) Near-record age of the average U.S. vehicle: According to an annual study by IHS automotive, the average age of around 250 million cars on the road in the U.S. is at an all time high of 11.4 years. ^[5] This is far higher than the usual average of 7-8 years. Although, IHS automotive predicted the average age to increase to 11.5 years by 2015 and 11.9 years by 2019, it can be argued that the increase in average age of these vehicles is simply an aberration brought about by the weak economic environment and falling real wages. ^[5] Given the improvements in economic activity and the drop in unemployment levels, it possible that this trend might reverse. If that happens, a number of consumers in the U.S. could be lining up to replace their older vehicles with newer models. This eventuality would also result in a bigger market for pickup trucks.

4) Low interest rate environment: The U.S. Federal Reserve is likely to retain its low interest rate policy until at least July 2015. In 2013, the Federal Reserve announced a reduction in bond purchases, which had kept the long-term interest rates low. The Fed has targeted short-term rates of between 0-0.25% since December 2008, and plans to keep them there for some time after it ends its bond-buying program in the fall of 2014. The Fed’s low rate policy might discourage auto companies from raising lending rates significantly. Additionally, with consumer demand weak for other types of loans and banks flush with huge amounts of money to lend, competition has increased as interest rates on car loans have fallen to the lowest levels since 2008.

We have a $20 price estimate for Ford, which is about 35% higher than the current market price.

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1. Auto Tech: Aluminum in the Ford F-150, Autos.ca, December 2014 [↩] [↩]
2. Homebuilder Confidence in U.S. Hovers Around Nine-Year High, Bloomberg, December 2014 [↩]
3. Gasoline and Diesel Fuel Update, EIA, December 2014 [↩]
4. US Auto Sales, Wall Street Journal, December 2014 [↩] [↩]
5. 253 million cars and trucks on U.S. roads; average age is 11.4 years, LA Times, June 2014 [↩] [↩]