Photographer: Daniel Acker/Bloomberg

A Rising Tide of Used Cars Threatens Ford’s Profits

  • Used prices start to fall after seven-year run of sales growth
  • Trend seen intensifying as more Americans return leased autos

All those years of rising U.S. auto sales are starting to work against carmakers.

A glut of used vehicles has started to depress prices. That trend will intensify as Americans will return 3.36 million leased cars and trucks this year, another jump after a 33 percent surge in 2016, according to J.D. Power. The fallout has already begun, with Ford Motor Co. shaving $300 million from its financial-services arm’s profit forecast for this year.

“Ford is the canary in the coal mine,” said Maryann Keller, a former Wall Street analyst who’s now an auto industry consultant in Stamford, Connecticut.

This drag may be hitting the rest of the industry, too. A National Automobile Dealers Association index of used-vehicle prices declined each of the last six months of last year. When auto lenders lease out vehicles, they charge the customer a monthly payment and make an assumption of the car or truck’s value when it will be returned for resale. If vehicles are depreciating more than expected, losses can pile up.

The NADA Used Car Guide’s price index dropped about 4 percent last year from 2015’s average, the first significant decrease since the recession. The boom in cars and trucks coming back off leases will continue into 2017, rising about 9 percent, J.D. Power estimates.

The impact of falling used prices has also hit Hertz Global Holdings Inc. The rental-car company replaced its chief executive officer last month, weeks after cutting its annual earnings forecast due to the falling value of its cars.

Faster Depreciation

The average used car depreciated about 23 percent last year, faster than the average annual rate of 18 percent, Edwin Groshans, an analyst at Height Securities LLC, said in a report Friday, citing NADA’s data.

“We expect this trend of above average annual depreciation to continue in 2017 and 2018,” Groshans wrote. This may drag on auto-finance companies including Capital One Financial Corp. and Ally Financial Inc., he said.

The trend has yet to put a damper on optimism at Ford’s chief rival. General Motors Co. this month predicted profit will rise more than analysts estimate for 2017, after meeting the high end of its targets for last year. Ford and Fiat Chrysler Automobiles are scheduled to report earnings on Thursday.

To keep the momentum going, GM may have to overcome a drop in auction values that Ford has said is spreading beyond passenger cars to larger vehicles. More automakers may join Ford in reassessing profit forecasts for their captive lending arms after making overly optimistic assumptions about the future value of used vehicles, Joe Spak, an analyst at RBC Capital Markets, wrote in a Dec. 7 report.

Cheaper Payments

New vehicle sales have jumped each of the last seven years, the longest period since at least the days of the Model T. When used car values were strong, it enabled automakers to offer consumers cheaper lease payments.

Leasing has helped consumers afford new vehicles becoming more expensive than ever. Prices have climbed 13 percent to $34,067 over the past five years, according to Edmunds.com, a rise partially driven by booming popularity of pricier trucks and sport utility vehicles.

In the past, leases were primarily a tool used by luxury automakers including BMW AG and Daimler AG, which could rely on them for as much as 70 percent of sales, Keller said.

“The difference this time, versus the last time we had a leasing bulge, is that leasing today doesn’t just apply to luxury cars,” she said. “It’s become a mainstay in mass-market cars and even pickup trucks.”

Leasing Pullback

Ford Motor Credit is now starting to cut back on leasing, relying on it for 18 percent of retail sales in the third quarter, down from 26 percent in the first quarter.

“We haven’t seen anything that suggests that what’s happening to our portfolio is different from what’s happening across the industry,” Bob Shanks, Ford’s chief financial officer, told analysts in November.

Another way automakers could cope is by expanding their offerings of certified pre-owned vehicles -- used cars with extended warranties -- to try to bolster prices.

The question for auto companies is whether pulling those levers will offset any losses from overlooking the true cost of using hefty incentives and discounted leases to boost new-vehicle sales.

“That’s just the game they play,” Keller said. “It’s deferring the loss, but those losses are now coming home to roost.”

(Adds Ford CFO’s comment in 16th paragraph. An earlier version of this story corrected the timing of Ford and Fiat Chrysler earnings.)
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