Incomplete Recovery of F-150 Sales Can Hurt Ford In The Long Run

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Ford Motors’ (NYSE:F) F-150 series of trucks has been the best selling model in the U.S. for multiple decades now. Last year, the company decided to do a changeover of the model. Previously manufactured with steel bodies, the new model will be made out of aluminum. The thinking behind this move was that as aluminum is lighter than steel it would allow the company to make more fuel-efficient and easier to handle trucks.

Ford makes the F-150 series of trucks at two factories — one in Dearborn, Michigan, and another in Kansas City. The two factories were closed down to install tooling for the launch of the 2015 version and a reasonable estimate can be made of having lost 100,000 units in sales because of the long shutdowns. The Michigan plant began production again in November, while the Kansas City plant started in March. But the two factories are not operating at full capacity right now, and it will be a while before they do. As a result, dealerships are running shop with very few trucks to sell. According to Ford management, a pickup truck on average spends 50-60 days in inventory at a dealership, but the popularity of the F-150 trucks in the U.S. has meant that each existing stock unit is spending around 20 days in inventory. [1]

In order to maximize profit, the company prioritized retail sales, which fetch higher margins, over commercial sales. The auto maker posted a 10% year-over-year gain in retail sales for March. From Ford’s perspective, this strategy makes sense. While supplies are low, it makes sense to sell to retail buyers who prefer higher-trim trucks than commercial buyers buying for their fleets. But commercial sales are a big part of Ford’s business around F-150, and it lost  out to GM on that front.

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We have a $14  price estimate for Ford, which is slightly lower than the current market price.

Risky Move

In the first quarter of 2015, Ford’s F-series sales, which include the F-150 and other Super Duty stylings, grew by 2% year-over-year. In comparison, sales of GM’s Chevrolet Silverado grew by 17.6% over the same period. [2]  However, GM didn’t raise the sales of Chevrolet Silverado by offering incentives to buyers. It appears that the auto maker is simply taking those commercial sales at a time when Ford can’t or isn’t willing to. In March, commercial sales of Silverado and GMC Sierra grew by a massive 41% compared to the same month last year. [3] Sales of trucks to commercial fleets — contractors, mining companies, and large corporations who buy 100’s of pickups at a time – are not as profitable as sales to retail buyers, but they are profitable in their own right, and usually Ford and GM compete hard for those sales. Presently, GM is winning out on that terrain quite comfortably.

It would be difficult to argue that Ford will not win back those sales when its plants return to full production capacity and dealerships have sufficient stock to meet demand, but the recent GM rally will put some doubt in the mind of investors. There is a chance that buyers will like the Silverado enough to keep buying it in the future. This matters because pickup trucks are the main drivers of profits for both Ford and GM in North America, and small shifts in pickup sales can have a significant impact on the bottom lines of both companies. In the first quarter of 2015, Ford reported a profit in North America ($1.3 billion), but the number was far lower than usual for Ford due to the impact of the slow roll-out of the remodeled F-150 and Edge crossover. The U.S. automaker sold 40% fewer  F-150 pickup trucks compared to the first quarter of last year, and over 50% fewer units of Edge. [4] According to Ford CFO Bob Shanks, the company would have made a profit of $1 billion higher if it were not for higher product launch costs and lost sales due to low inventory. [5]

While we expect F-150 sales to recover over time, if the rate of the recovery is slow and if some of GM’s recent gains in the market turn out to be permanent, it could heavily impact Ford’s profitability going forward. If Ford’s market share only improves to 20.7% by the end of our forecast period and average unit price per truck sold falls by $1,000 (or 3%), it can have a downside of close to 10% on the company’s stock price.

See our complete analysis for this scenario

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Notes:
  1. The Sooner Ford Gets Up to Full Speed with 2015 F-150 Production, the Better, Ford Truck Enthusiasts, April 2015 []
  2. Pickups and Crossovers Drive Best Chevrolet and GMC Truck Sales in March since 2007, General Motors Investor Relations, April 2015 []
  3. Ref: 2 []
  4. Ford Motor’s (F) CEO Mark Fields Discusses Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, April 2015 []
  5. Ref: 2 []