Strongest U.S. Sales Momentum In Over A Decade Bodes Well For Ford and GM

December 2015 looks set to be the best month for auto sales in the U.S. in over a decade. Due to extra selling days (i.e. days not including Sundays and other public holidays), light vehicle sales, which include sales of cars, SUVs and pickups, are expected to grow 6% year over year in December. Other factors such as low gas prices, cheap interest rates that allow favorable financing terms for car loans and improving economic conditions, are also expected to contribute. The 6% growth will push total vehicle sales in 2015 to 17.5 million, an all time record for the U.S. car market. ^[1] Two companies well positioned to benefit from this trend are Ford Motors  (NYSE:F) and General Motors (NYSE:GM).

Ford

Sales of pickups from the F-series brand of Ford vehicles have been booming in recent months. The F-series is expected to be the best selling vehicle in the U.S. for the 39th year running. Usually when auto sales are peaking, companies tend to offer promotional discounts in order to generate year-over-year gains. Ford tried such a thing that yielded mixed results.

Early in November, Ford kicked off a huge promotional campaign for its vehicles. The campaign called the “Friends and Neighbors Pricing Event” involved Ford offering its vehicles at discounted prices until January 4. The discounts weren’t very steep: most vehicles are selling at prices within $200 of what they cost dealers. However, combining said discounts with low-interest financing that Ford offers, along with the extra money the company was offering dealers on each vehicle sale, could well have resulted in significant cuts to the company’s profits. Ford’s management thought of the program as a way to cut through the noise that end-of-year advertising programs usually generates by giving customers clear terms and allowing them to sidestep the cumbersome price-negotiation process with dealers.

However, the company recently backed away from the program after it produced mixed results in November. ^[2] Sales of some models increased as a result of the fixed price promotion but many customers found the campaign confusing and as a result the company scrapped it in favor of a more traditional holiday plan comprising of cheap financing and cash back offers at the beginning of this month.

Ford’s North America unit made profits of $2.7 billion before taxes in the previous quarter. Its operating margin was also strong at 11.3%. Moreover, its transaction prices were strong at $34,600 in October, up 5.5% from a year ago. Strong sales of pickups should help Ford retain profitability in the fourth quarter as well.

General Motors

GM has also benefited from the strong sales momentum of SUVs and pickups. On a year-to-date, industry-wide basis, sales of pickups are up by 9.5%, sales of crossovers are up 17.6% and overall sales of SUVs are up by 10.4%. ^[3] The Detroit based auto maker sells SUVs and pickups through four different brands: Chevrolet, Buick, GMC and Cadillac. Chevrolet’s retail sales of SUVs  rose by an impressive 26% in the previous month. On the pick-up front, Chevrolet Silverado gained 5% in sales on a year-over-year basis, despite strong competition from Ford’s F-series pickups. Another trend that has resulted in benefits for GM has been the increasing transaction prices of vehicles. Low interest rates and longer term periods have resulted in a higher percentage of SUV and pickup sales. In November, GM’s transaction price on each vehicle stood at $35,800. This combined with the planned reduction of sales to rental buyers, should help raise the transaction prices even further in the coming months.  This also should limit the availability of cars on the used car market in a few years, therefore resulting in higher residual prices and hence more competitive leasing terms going forward.

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1. Edmunds Puts 2015 SAAR at 17.5 Million, F&I Showroom, December 2015 [↩]
2. Ford Drops ‘Friends & Neighbors’ Sales Promotion That Falls Flat With Customers, Wall Street Journal, November 2015 [↩]
3. WSJ Auto Sales, December 2015 [↩]