Preliminary monthly data showed that March auto sales in the US increased 12.7% and that Ford’s (F) performance was its best showing for the month in five years. The industry-wide seasonally-adjusted rate came in at a whopping 14.4 million vehicles. Although Ford’s growth rate trailed other car manufacturers, many peers were lapping easy comparisons due to last year’s production setbacks, and we’re not reading too much into it. We continue to believe Ford is a core position in the portfolio of our Best Ideas Newsletter.
Though the increase in Ford’s sales was lower than peers’ during the month, we can’t find too much fault in the company’s monthly performance and are excited about what the numbers may mean with respect to profitability. As it outlined in its fourth-quarter report earlier this year, Ford believes 2012 pre-tax operating profit will be equal to that in 2011. Retail sales for Ford in March increased 11% as measured by dealer sales to the public, while daily-rental sales (fleet sales) fell. For one, fleet sales often occur in bulk, thus giving the purchasers higher incentives. Additionally, fleet customers traditionally don’t opt for the add-ons that drive marginal profitability increases at the automakers. However, we think this mix in March bodes very well for future profitability and may actually speak to operating-profit expansion during 2012. Further, on its sales call, Ford’s management pointed out that industry-wide incentives were down or flat—meaning average car selling prices should be higher than last year, which should help margins.
Another positive sign for profitability, Ford experienced robust growth in truck sales, with units sold growing about 11%. Not only are these trucks more profitable than cars, but trucks are also indicative of an improving domestic economy. More consumers (and small businesses) demanding new, pick-up trucks only bodes well for the construction, energy and infrastructure end markets. With gas prices nearing all-time highs, we think more of these buyers may opt for a more fuel-efficient V6 engine–a market where Ford has approximately 75% market share.
In addition to strong truck sales, Ford’s small cars seem to be resonating with consumers, too. The company sold 65% more of the Focus model and 4% more of the Fusion in March. For the quarter, Ford’s car sales advanced 9.2%, and we think that the mix of an improving economy and high gas prices will drive further demand in the fuel-efficient car segment during the second quarter and through the course of the ongoing replacement cycle.
Another positive number was the company’s 4.1% increase in Lincoln sales year-to-date. The brand has struggled in recent years to connect with luxury consumers, who seem to prefer Cadillac’s (GM) and Audi’s (VLKAY). In the past year, Ford has finally made some strides. After hiring Max Wolf from Cadillac to head the design team, Lincoln has introduced a pallet of new cars including the MKZ and MKS. Consumer taste in vehicles will always be volatile, but we expect buyers to eventually come around as Lincoln continues to bring great products to market.
GM continues to struggle
While Ford continues to improve, we’re growing more concerned about General Motors (GM), though results at the automaker continue to improve as well. General Motors’ headline sales in the US looked strong, up 12%, but retail sales for the year (dealer sales to the public) were negative. Every brand except Chevrolet was down for the year, and we think the strong March number may be more a function of the warm weather during the month than any meaningful and definitive upward deviation from industry results.
Unlike Ford, GM doesn’t have a great small car offering, in our opinion, nor does it have any single category as dominant as the F-series. With gas prices continuing to rise, we think Toyota (TM), Ford and Kia will benefit, while GM may trail peers due to ongoing poor public perception regarding fuel-efficiency. Additionally, we think Cadillac will start to lose ground in the luxury car market as competition continues to heat up.
We prefer Ford to GM. Ford’s shares are not only more undervalued than GM’s, but they also provide a decent dividend income stream for investors willing to wait for a resumption in strong auto sales to be more appreciated by the market.