2 Great Signs That General Motors' Fleet Reduction Strategy Is Working

By Markets Fool.com

Image source: General Motors.

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It's common for similar automakers to have similar business strategies. For instance, over the decades, Japanese automakers have mostly been known for making fuel-efficient and high-quality vehicles. Detroit automakers have been known for designing and producing wildly popular trucks and SUVs.

Because Ford Motor Company and General Motors are so similar, it was a bit strange when the two took such different approaches to fleet sales early in 2016. Here's a look at the differences, how that will play out throughout the year, and perhaps proof that GM's strategy is paying off with recent awards.

GM vs. Ford

Despite the negative connotation of fleet sales in general, many investors now recognize that not all fleet sales are margin-killers. In fact, Ford and GM find commercial vehicles and government sales very profitable, and Fiat Chrysler Automobiles would like to win more of that business. Sales to rental fleets, however, are still typically lower-margin sales -- though it's certainly not hurting Ford's and GM's margins in North America right now.

The difference during the early part of 2016 was stark, as Ford's fleet sales are expected to be much higher throughout the first half of 2016 before tapering off throughout the back half of the year. GM, on the other hand, has continued to slash rental fleet sales to the point that it's actually noticeable year over year in its monthly sales reports.

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During the first quarter, Ford's total fleet sales accounted for 36% of its total U.S. sales, much higher than its 29% level from the prior year's first quarter. Much of that increase was fueled by rental fleet sales; rental sales generated 17 percentage points of the 36%, while it only represented 11 percentage points of last year's 29%.

Meanwhile, during the same time period, fleet sales accounted for only 21.5% of GM's first-quarter sales in the U.S. market, and its sales to rental fleets plunged 36%.

Why does it matter?

The reason is simple: New-vehicle leases are on the rise, and the price and profitability of those sales are determined by a vehicle's residual value. That residual value is what the vehicle is estimated to be worth on the used-car market at the end of the lease. In past years, GM has posted much lower than average residual values, in part because it sold so many vehicles into rental fleets that when those companies flooded the vehicles into the used-car market, it sent prices and residual values lower.

A look at the fleet version of the Impala. Image source: General Motors.

Now that GM has been focusing on reducing fleet sales, it's improved its residual values. The figures are represented as a percentage of its selling price after three years. During 2009, GM's average residual value was 36.5%, according to TrueCar, but that has improved significantly to 47% at the end of 2015 -- about industry average.

Another good sign for investors came this week when a number of GM's fleet vehicles won awards. Vincentric, a private automotive data compilation and analysis company, handed out its 2016 Best Fleet Value in America awards, and it included five GM vehicles: the Chevrolet Impala Limited LS, the Chevrolet Express G2500 (full-size passenger van), the GMC Sierra 1500, and the Chevrolet Silverado 2500 and 3500.

At a time when GM is already printing profits thanks to sales of SUVs and full-size trucks, the fact that its least-profitable fleet sales are in decline (which consequently improves its residual values and the value of its leased vehicle sales) mean it's shaping up to be another solid year for Detroit's largest automaker.

The article 2 Great Signs That General Motors' Fleet Reduction Strategy Is Working originally appeared on Fool.com.

Daniel Miller owns shares of Ford and General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.