Are Ford's Sales Gains Better Than They Look?


Last week, analysts at Kelley Blue Book weighed in with their predictions for March auto sales. While their forecast calls for a strong month overall, one surprise was the relatively weak gain they foresaw for Ford (NYS: F) .

This week, analysts from and Edmunds published their own forecasts, and their storyline is similar: a big month for many automakers, but just a small year-over-year gain for the Blue Oval. What's going on?

A very strong month -- for most
Like other forecasters, TrueCar and Edmunds both see overall March auto sales coming in strong. TrueCar's analysts expect overall new light-vehicle sales (a category that includes cars, pickups, and SUVs) in the U.S. to be up 13.7% over the year-ago month, while Edmunds sees a 17% gain.

Edmunds' total translates into a seasonally adjusted annualized rate (or "SAAR," a widely watched auto-sales metric) of 14.9 million, not quite as strong as last month's spectacular 15.1 million but still a strong number that bodes well for the U.S. economy.

But on the surface, it doesn't seem to bode so well for Ford. TrueCar predicts that Ford's total sales will be up just 1.4% in March, a prediction that's roughly in line with Kelley's and well behind estimates for the overall market. That will translate, TrueCar predicts, into a sizeable loss of market share: 15.2%, versus 17% a year ago. Edmunds sees a somewhat bigger, but still small, gain for the Blue Oval: 4.8%.

How can this be? Nearly all of Ford's products are at or near the top of their market segments in most reviews. Sales of the compact Focus have been on a tear, a warm winter has spiked Mustang sales, and Ford's F-series pickup -- America's best-selling vehicle - continues to post strong results month after month.

So why are Ford's sales down?

According to Ford officials, it's because Ford wants them to come down.

Why would Ford want to reduce its sales?
Increasingly, Ford is making an effort to limit its sales to fleets -- but not all fleets, executives say. While all profitable sales are arguably good, some kinds of sales are better than others. Overdependence on fleet sales was seen for many years as a key problem for Ford -- and General Motors (NYS: GM) as well.

Here's why: Fleet sales -- bulk sales of cars or trucks to corporate customers, governments, and rental-car firms -- were long seen as a way for the Detroit automakers to keep factories running at full speed. But doing so meant sacrificing profits, as fleet sales tend to be a low-margin business. Sometimes, with less-competitive or dated models, fleet sales represented a huge percentage of total production - production that wasn't making much money for the automaker.

At one point, fleet sales were so important to Ford that the company owned part of rental-car giant Hertz (NYS: HTZ) . That has largely changed. Nowadays, Ford doesn't necessarily need huge fleet sales, and the company sold its stake in Hertz several years ago. But fleet sales aren't all bad: Done right, commercial and government sales are a solid, profitable, steady business, and Ford is always happy to sell more work trucks and police cars.

It's the rental cars that can be problematic. First, the rental companies demand and get deep discounts. Second, rental-car companies sell off their vehicles after a few short years, flooding used-car wholesale auctions with thousands of similar cars. That depresses the retail value of those nearly new models, which complicates the automakers' leasing businesses and makes it harder to get premium prices for those cars at retail when they're new.

But getting rid of rental-car sales altogether isn't good, either, and Ford's unlikely to get out of the business entirely. These sales are profitable ones, after all, as companies such as Toyota (NYS: TM) -- which appears to be increasing its sales to rental-car fleets in the U.S. -- already know. It's good marketing to have some cars in rental fleets, to expose them to people who might not otherwise try your brand. This is especially important for a company like Ford, which has made huge strides in quality in recent years -- strides that many consumers don't yet know about.

Fewer sales, but more profits?
So far this year, Ford's total fleet sales have accounted for 31% of its U.S. sales, down from 33% in 2011. And a larger percentage of those are commercial and government sales: Through February, Ford's sales to rental-car companies were down 7%, according to Erich Merkle, the company's sales analyst.

Those declining fleet sales have obscured Ford's retail gains to some extent. The company's retail sales are up 14% through February, slightly ahead of the overall market's gains, even as the company's total sales numbers have been less impressive-looking.

Here's the upshot: Yes, Ford's overall sales have recently been growing more slowly than those of its key competitors. But at least to some extent, that's a result of a decision by Ford to focus (so to speak) on the most profitable and beneficial kinds of sales -- and looked at through that lens, Ford's sales growth has been on par with (or a bit ahead of) the overall market.

Long story even shorter, from a shareholder's perspective, this should add up to better overall margins and more profits in time. Will it? We'll find out.

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At the time thisarticle was published Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at@jrosevear.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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