Fiat Chrysler Makes a Wise Move, Takes a Page Out of General Motors' Book

By Markets Fool.com


FCA's 2017 Ram Truck. Image source: Fiat Chrysler Automobiles.

Continue Reading Below

In the years during and after the Great Recession, it was fairly common to see our readers describe Detroit automakers such as General Motors (NYSE: GM) and Fiat Chrysler Automobiles (NYSE: FCAU) as "fleet queens." The notion was that fleet sales -- and to be fair, fleet sales had put Detroit automakers into less desirable positions in prior years -- were akin to the devil, and that was the only way said automakers could generate market share.

Fast-forward to the present, and General Motors has learned its lesson and FCA is apparently taking a page out of GM's book and it's a good move.

Night and day difference

Let's look at some of the figures that describe the difference between General Motors in 2013 when its financials were already far better than they had been during the recession and thethe automaker as it is now.

In 2013, the U.S. automotive industry sold 15.6 million vehicles, and GM's slice of that pie was a healthy 16.1%. For 2016, total new-vehicle sales are likely to hit in the mid-17 millions, and GM's market share is 17.1% year-to-date and hit 18.8% during October.

Continue Reading Below

Those figures are nice and all, but the real success story lies in GM's incentives, average transaction prices (ATPs) and fleet sales. In 2013, GM's ATP checked in at about $31,000; recently that figure hit $35,000 per vehicle. Better yet, GM's U.S. daily rental sales as a percentage of total sales has declined 600 basis points, from 15.8% in 2013 down to 9.8% for the year, through September.

GM's incentives as a percentage of ATPs vs. the industry average were 112% in 2013 -- and to be fair, Detroit incentives are always higher than the average due to the vast amount of trucks those automakers sell, generating both higher price tags and higher incentives in general -- but that figure has declined to only 102% through September 2016. With fewer sales to the least desirable of fleet channels, also known as daily rental sales, a shrinking amount of incentives compared to the industry average and higher transaction prices, GM's North America EBIT-adjusted margins jumped from 7.8% in 2013 to 10.7% through September.

What the heck is going on?

The weird thing is that Japanese automakers, which haven't been known to pursue large amounts of fleet sales, have started testing the waters as auto sales peak in the U.S. market. For example, Hyundai/Kia has sold roughly 270,000 vehicles to rental fleets through October, a large 27% increase compared to the prior year. The story is similar at Nissan, which has sold an additional 65,000 vehicles to rental fleets this year, according to Forbes, which is a staggering 39% jump.

Fortunately for those investors taking a flyer on Fiat Chrysler Automobiles in hopes of a company-wide turnaround, the automaker is taking a page out of GM's book and trimming its less-profitable fleet sales. More specifically, FCA cut its fleet deliveries by 23% last month.

Jeff Shuster, an analyst for LMC Automotive, said that was music to auto investors' ears: "FCA has been on the higher side of rental fleet as a share of total sales, so I think it is a significant move given the flattening of real demand," he told Automotive News. "It suggests that the unhealthy habits of chasing share and volume growth are not the path forward."

Not only are fleet sales less profitable than retail sales to individual consumers such as you and I, if an automaker sells into that channel for a lengthy period of time, it begins to dent its resale values -- and that brings a host of other problems with it. For FCA, an automaker that in my opinion hasn't made a long-list of great moves in recent years, this is a no-brainer move that should help boost its profitability as it attempts to turn its business around.

10 stocks we like better than General Motors
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and General Motors wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 7, 2016

Daniel Miller owns shares of General Motors. 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.