Not all sales are equal, and that phrase is especially true for what was once the unacknowledged side of the automotive industry: Fleet sales.
Once upon a time, Detroit automakers such as Ford Motor Company (NYSE: F) and General Motors (NYSE: GM) filled excess production capacity with fleet sales, which were low-margin bulk sales to companies such as Hertz (NASDAQ: HTZ), among other large buyers.
Investors viewed it as a painful process and a necessary evil in decades past. However, over the past few years, fleet business has come into its own. And now, with electric vehicles (EVs) in the mix, fleet sales are starting to provide intriguing upside.
Fleet sales and upside? Really?
It’s difficult to believe, but yes, fleet sales are no longer the issue they once were. In fact, recent deals such as GM’s agreement to sell Hertz 175,000 EVs over the next five years could end up being quite lucrative.
The multi-billion-dollar deal spans a range of vehicle segments and price points, including more profitable pickup trucks and SUVs. Here’s the kicker: GM’s North American operations chief noted that the automaker expects to deliver the EVs at “close to retail profit margins.”
Even Tesla (NASDAQ: TSLA) got in on the fleet action when it inked a deal to sell Hertz 100,000 Teslas in what was then the single largest EV purchase in history. The deal was said to be near list price — a far cry from the heavily discounted fleet sales of the past.
In the past, a large fleet order would be met with groans on many conference calls, but it’s a different industry now. The news sent Tesla’s stock up 13%.
Insurance policy
Fleet sales that were once viewed as desperation attempts to keep the production line moving could now end up being more of an insurance policy for EVs. Currently, EVs represent roughly 5% of U.S. new vehicle sales, and that has historically been the tipping point when sales boom and mass adoption gains traction.
If the U.S. follows similar trends to the nearly 20 other countries that have hit the 5% threshold, EVs could represent up to 25% of new vehicle sales by the end of 2025. That’s massive upside, but what happens if that doesn’t take place as quickly as it has in other countries?
Automakers would be able to use fleet sales as an insurance policy. Big companies will still be looking to switch their fleets over to EVs long-term, even if the public adopts EVs more slowly than anticipated.
One example is Amazon‘s order of 100,000 electric vans from electric vehicle maker Rivian. Another example was FedEx ordering as many as 20,000 electric delivery vans through GM’s BrightDrop. It’s also likely that Hertz competitors will follow its lead into modernizing their rental fleets with EVs.
The bottom line
Fleet sales are no longer the dirty little secret that Detroit automakers preferred to hide. Management expects fleet sales to be closer to retail margins going forward, especially once EV costs are lowered in the near-term. Fleet sales should also offer an insurance policy in volume if EV mass adoption is slower than anticipated. For investors of Detroit automakers in years past, this is a welcome development.
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Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
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