Another Look: Some Facts Investors Might Have Missed In Ford’s May Sales Numbers

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Ford Motors (NYSE:F) reported a 1.3% year-over-year drop in sales for the month of May. [1] The numbers might have disappointed investors especially as U.S. auto sales for May 2015 reached an Seasonally Annual Adjusted Rate of 17.7 million and a 1.3% year-over-year increase in unit sales on the back of a Memorial Day Holiday and a five-weekend month. [2] However, there are some important details that investors might have overlooked when considering the reported numbers from Ford. In this note, we take a look at those details.

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

F-Series

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Ford’s 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 last year, while the Kansas City plant started in March. But the two factories are still not operating at full capacity. As a result, dealerships are running shop with inventory lower than full capacity. 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 25 days in inventory. [3]

In order to maximize profit, the company prioritized retail sales, which fetch higher margins, over commercial sales. The auto maker posted high single digit year-over-year gain in retail sales for March-May period. 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.

In the month of May, Ford reported just under 62,000 unit sales of the F-150 trucks. [4] This was lower than the combined sales of GM’s Chevrolet Silverado and GMC Sierra trucks, which came in at just over 70,000. [5] It looks like the combined sales of these two trucks will outpace Ford’s F-150 sales for the first time in five years. This is highly significant, since the F-150 is the most profitable vehicle for Ford and raises the question of how soon the company can reach full production levels and start to regain market share.

Smaller Summer Shutdown

This is why the company has decided to shorten the standard summer shutdown for its North American assembly plants from two weeks to one week. [6] The one week reduction could help Ford raise production levels by around 40,000 units. The majority of these units will be full-size trucks and popular SUVs/utilities. In addition to Ford’s F-150 trucks only spending around 25 days in inventory compared to the 60 day industry average, inventory levels of the Ford Edge and Ford Escape have also been light. [7] The former has been spending only 13 days on average in dealership lots. The increased supply can help reverse these trends somewhat. [7]

Higher Transaction Prices

Even though, F-150 sales have been lower than usual, each unit is raking in more money than usual. The average selling price of an F-150 truck for the month of May stood at $43,000, close to 7% higher than compared to a year ago. [4] The figure is also a record high for the truck. One reason for the higher transaction prices is that the truck’s premium trim packages are selling extremely well. For the month of May, nearly two-thirds of F-150 units sold via the retail channel were premium models, a rate that compares very favorably with the historical sales mix of the F-150. [4]

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Notes:
  1. Details of Ford Motor Company’s May 2015 U.S. Sales Conference Call, Ford Investor Relations, June 2015 []
  2. Here come auto sales …, Business Insider, June 2015 []
  3. The Sooner Ford Gets Up to Full Speed with 2015 F-150 Production, the Better, Ford Truck Enthusiasts, April 2015 []
  4. Ref: 1 [] [] []
  5. Ref: 2 []
  6. Ford Reduces Summer Shutdown to Meet Demand for Ford F-Series Trucks, Edge, Escape and Explorer, Ford Media, June 2015 []
  7. Ref: 3 [] []