Shares of automaker Ford (NYSE:F) are trading down off of "disappointing" March 2016 sales results. I use disappointing in the loosest way, as unit sales grew 8% versus a Kelley Blue Book and Edmonds expectation of 9% growth. Less-than-anticipated growth, as well as Tesla's (NASDAQ:TSLA) blockbuster order book for the Model 3 has created a near-term buying opportunity, as the composition of Ford's growth suggests robust profitability.
Shares of GM (NYSE:GM) are down a similar level, even as it experienced a similarly solid mix shift. However, it's total product sell-through looks worse than Ford, and I think the company's lack of unit growth will weigh on profitability.
Ford's growth driven by SUVs, trucks
After spending years shifting its capacity to smaller vehicles, Ford generated stellar growth in March (and Q1) from its popular fleet of SUVs and light trucks. Key products like the Escape (+8.4%), Edge (+48.9%), and Explorer (+4%) drove overall SUV growth of 13% y/y in March. YTD, sales are up a whopping 15% in this segment.
Similarly, truck sales were up 11.4% y/y in March, with the recently retooled F-Series notching an impressive 9.1% sales gain. Sales of Ford's most profitable truck are up 5% YTD, with total truck sales up a robust 8.3% YTD.
Lincoln, which is a less meaningful part of the business, is actually performing fairly well, with sales up 16% YTD. Unfortunately, I do not believe this is the result of a fundamental turnaround, but rather simply the function of robust demand for high-end SUVs. Lincoln car sales were down 11.4% in March and are down nearly 1% so far this year.
Car sales haven't been great, with unit growth of about 1.4% YTD with monthly unit sales mostly oscillating up or down a few percentage points. Luckily for Ford investors, its products do not compete much with the Tesla Model 3. The Fusion, which has certainly been a star in recent years, could face some pressure. However, I think this vehicle, and the majority of Ford's lineup, is geared towards a lower-end consumer.
Without question, I'd like to see cars performing as well as trucks, but given the option of growth in one segment or the other, I'll take trucks and SUVs every time. SUVs carry higher ASPs and stronger profit margins, carrying the average Ford transaction price up $1,600 compared to February.
With the mix shifting heavily in favor of SUVs and trucks (70% of Ford brand sales), I think Ford's guided operating margin in North America of 9.5% or higher in 2016 will prove conservative. The company notched an operating margin of 10.2% in 2015 with a mix tilted more heavily in favor of cars, so I think 10.5%-10.7% in North American operating margins are achievable. If revenue only comes in equal to Ford's implied guidance of $98.37B and the company achieves a 10.5% operating margin, it will lead to $983M in EBIT above expectations. This could create at least another $500M in operating cash flow to help funnel back to investors via dividends.
GM Struggling in the smaller SUV category-Tesla could take share
GM, which is also highly levered to light truck and SUV demand, is actually doing an ok job of keeping pace with the F-Series and larger SUVs, but it is struggling mightily in the smaller category. Sales of the Chevy Silverado and GMC Sierra are up about 4.6% YTD, only slightly trailing the growth in the F-Series. Sales of the Suburban (+16% y/y) and the Tahoe (+11.6% y/y) were pretty good, the shift to the Edge and the Escape are hurting some of GM's more important models like the Equinox (-11.7% y/y) and the Traverse (-3.2% y/y). Overall, Chevy sales were up just 0.9% in March, but the SUV-centric GMC grew at a solid 6.9% clip.
This is where GM's brand diversity hurts it. Buick sales, though up 7.5% YTD due to the Regal and Encore, were down 11.3% y/y in March. With the mix shifting even more heavily in favor of SUVs and Regal growth slowing, I think this segment could be a drag on GM for the rest of 2016.
Cadillac, which is similarly geared towards cars, has seen its sales drop 4.1% YTD, with the decline accelerating to 5.1% in March. While I imagine the Escalade could be among GM's most profitable vehichles on a per-unit basis, it will be difficult for the brand to achieve growth with its car-dominant lineup. Plus, this segment faces more competition from the Tesla Model 3 Lincoln, which is a small portion of Ford's business. The ATS competes directly in the same pricing and demographic as the Model 3, and given the Model 3's 200K preorder figure, I think this entire segment is under pressure.
Buy Ford on the Dip, Hold off on GM
Ford is performing extremely well in the highly profitable SUV and light truck market. CEO Mark Fields provided modest profit expectations for Ford in North America that should easily be eclipsed assuming a consistent product mix going forward. Shares continue to trade at a low valuation, but expect this shareholder friendly management team to award investors with capital returns from robust free cash flow.
As for GM, I do not have a particularly sophisticated view on the long-term value of the company-I certainly have not covered it as closely as Ford. However, I think GM faces stiff completion in light trucks and SUVs, a heavy car mix, and a key product in the ATS that is under attack from the Tesla Model 3. I'd avoid shares ahead of Q1 earnings.
Disclosure: I am/we are long F.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.