How GM Is Making Big Strides In The U.S. Auto Market This Year

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General Motors (NYSE:GM) is making big strides in the U.S. auto market as its marquee pick-up truck Chevrolet Silverado posts heavy gains without any incentives. The U.S. pick-up truck market is dominated by three vehicles: Ford’s F-150 series of trucks, Fiat-Chryslet’s Dodge Ram, and Chevrolet’s Silverado. However, the market is in a state of transition as Ford slowly rolls out its all new 2015 F-150 series. Ford retooled its factories last year to replace the older version of its trucks with a new series of trucks made from an aluminum body instead of a steel body. In that process, the production rate of the trucks slowed down and dealerships were operating with inventory levels below full capacity. According to the Ford management, the Ford dealerships will have full inventory only by mid-to-late summer. In the meantime, it looks as though GM has an opportunity to capture significant market share and grow its profits.

We have a $40 price estimate for General Motors, which is about 10% more than the current market price.

Slow F-150 Roll out

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Ford makes the F-150 series of trucks at two factories — one in Dearborn, Michigan, another in Kansas City. The two factories were closed down to install tooling for the launch of the 2015 version and a reasonable estimate can be made of having lost 100,000 units in sales because of the long shutdowns. The Michigan plant began production again in November, while the Kansas City plant started in March. But the two factories are not operating at full capacity right now and it will be a while before they will be. As a result, dealerships are running shop with very few trucks to sell. According to Ford management, a pick-up truck on average spends 50-60 days in inventory at a dealership, but the popularity of the F-150 trucks in the U.S. has meant that each existing stock unit is spending around 20 days in inventory. [1]

In order to maximize profit, the company is prioritizing retail sales, which fetch higher margins, over commercial sales. The auto maker posted a 10% year-over-year gain in retail sales for March. From Ford’s perspective, this strategy makes sense. While supplies are low, it makes sense to sell to retail buyers who prefer higher-trim trucks than commercial buyers buying for their fleets. But commercial sales are a big part of Ford’s business around F-150 and it is losing out to GM on that front.

GM Capitalizing

In the first quarter of 2015, Ford’s F-series sales, which include the F-150 and other Super Duty stylings, grew by 2% year-over-year. In comparison, sales of Chevrolet Silverado grew by 17.6% over the same period. [2] However, GM isn’t raising the sales of Chevrolet Silverado by offering incentives to buyers. It appears that the auto maker is simply taking those commercial sales at a time when Ford can’t or isn’t willing to. In the month of March, commercial sales of Silverado and GMC Sierra grew by a massive 41% compared to the same month last year. [3] Sales of trucks to commercial fleets -contractors, mining companies, and large corporations who buy 100’s of pickups at a time – are not as profitable as sales to retail buyers, but they are profitable in their own right, and usually Ford and GM compete hard for those sales. Presently, GM is winning out on that terrain quite comfortably.

It would be difficult to argue that Ford will not win back those sales when its plants return to full production capacity and dealerships have sufficient stock to meet demand, but the recent GM rally will put some doubt in the mind of investors. There is a chance that buyers will like the Silverado enough to keep buying it in the future. This matters because pick-up trucks are the main drivers of profits for both Ford and GM in North America, and small shifts in pick-up sales can have a significant impact on the bottom lines of both companies.

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Notes:
  1. The Sooner Ford Gets Up to Full Speed with 2015 F-150 Production, the Better, Ford Truck Enthusiasts, April 2015 []
  2. Pickups and Crossovers Drive Best Chevrolet and GMC Truck Sales in March since 2007, General Motors Investor Relations, April 2015 []
  3. Ref: 2 []