Fed Announcement Is Great News For Ford And GM Truck Sales

Includes: F, GM
by: Trefis

By now, everyone's aware that Mr. Ben Bernanke's decision to delay the taper surprised the financial world. The Fed's bond buying program remains unchanged at $85 billion dollar a month. News of the announcement pushed down the 10-year treasury yield by 17 basis points [treasury.gov]. While cheap credit is obviously good for the auto industry, American automakers such as Ford Motors (NYSE:F) and General Motors (NYSE:GM) stand to gain more. The reason being their dominant position in the pickup truck category.

Pickup trucks have a strong correlation with the housing market since they are used extensively in construction activities. Thus, a strong housing market bodes well for the profitability of the American automakers. The housing market has largely been solid this year. Therefore, it doesn't come off as a surprise that the light truck market (consisting of pickups, SUVs and crossovers) has outperformed the overall automotive market this year. The light truck market is up 12.9% through August while the car sales have risen only 6.9% [U.S. auto sales, wsj.com].

The Fed's decision to delay the taper is likely to push down the mortgage rates as well. Mortgage rates had already spiked in the last couple of months ever since the Fed announced that it may soon begin to taper the quantitative easing program. The housing market is highly sensitive to the mortgage rates, which in turn move in accordance with the Treasury yields (or the risk free rates).

American Operations Very Critical

It's only been on the strength of the operations in the U.S. that the American autos have consolidated in the last couple of years. The F-Series and the Silverado are perennial best sellers and continue to be so with sales up 22.1% and 25.4% respectively in the first eight months of the year. Foreign automakers such as Toyota, Honda, Nissan and Volkswagen have a greater presence in the car market.

Pickup trucks account for a disproportionate amount of North American profits for Ford and GM. Although auto companies don't reveal the exact figures, it is a common consensus among the industry experts that the pickups have fatter margins as compared to small cars. Some estimates suggest that the automakers earn anywhere between $5,000 to $8,000 per pickup (after incentives) compared to a few hundred dollars earned on most cars. Thus, any move that can potentially impact the sales of pickups is bound to dent the companies' profits. At the moment, however, things are looking good for Ford and GM.

We have a $17 price estimate for Ford, which is in line with the current market price.

Disclosure: No positions