Ford Earnings Preview: Declining F-150 Market Share Could Dampen Results

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Ford Motors (NYSE:F) is scheduled to release its earnings for the second quarter of  2015 on July 28th. [1].  It has been an atypical year for the company: in a normal year, Ford makes most of its profits in the first half of the year and introduces newer models in the second half of the year, which raises costs and affects profitability. However, in 2015, the opposite is expected — the company is still incurring heavy costs in rolling out a new model of its most profitable vehicle, the F-150 series pick-up truck. Below, we take a look at the sales data from the three main regions in which the company operates, to get a better sense of what to expect from the company in the second quarter.

North America

North America is not only the most profitable region for the company but also its most critical region, as when profits there suffer, the company’s overall profitability tends to suffer, too.  In the first quarter, profitability in the region was weighed down by the low supply of the company’s best selling F-150 pick-up trucks.  Ford is undertaking a refresh of the F-150, which before this year was made from a steel frame and body.  With the new model, the company has closed down production at the two plants where it is manufactured — Dearborn in Michigan, and Kansas City — to allow for their retooling, so that the trucks could be manufactured with aluminum bodies. The plants are now running at full capacity but supply has been tight for months.

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The company has tried to make up for the low inventory by trying to sell most of its available inventory to retail buyers, who tend to prefer higher-trim trucks, which command higher margins, as opposed to commercial (fleet) buyers, who tend to buy 100’s of units all at once, often at a slight discount. As a result, the company has lost out on market share in the commercial sales segment to GM, whose Chevrolet Silverado has done really well over the quarter. In the first half of the year, sales of the Chevrolet Silverado are up by close to 15%, while F-150 sales have declined by 2.4%. [2]

China

China is not only already the world’s biggest auto market, but it is also one of the fastest growings. It is expected that new-car sales in China will reach 30 million by 2020, compared to 20 million in 2014. The region will contribute to close to a third of all new-vehicle sales in the world by that time period. As a result, Ford is increasing its presence in the region, both in terms of its car models and production capacity. The company recently opened its sixth assembly plant in the region, increasing its capacity by a quarter of a million vehicles. Additionally, the company also launched the Lincoln brand in the country late last year and that should soon start contributing to the company’s profits. Lincoln has received good customer response, according to Ford’s management, and it is quite likely that the company will soon start producing the vehicle in the region to further drive up sales and profitability. However, the recent slowdown in China might be a cause for concern. Rival company GM managed to drive up profitability in China through a combination of cost cuts and new higher-margin product launches, but Ford didn’t follow a similar strategy and could have suffered in the second quarter as a result.

Europe

Since 2012, Ford has lost over $4 billion in Europe. The region has been slow to recover from the financial crisis and annual new-car sales have still not reached their pre-recession levels. However, Ford is slowly starting to turn around its operations in the region. In the first quarter, the U.S. auto maker sold more than 335,000 vehicles, representing a 12.5% increase compared to the same period last year. [3] More importantly, nearly three-fourths of those sales were made in the retail and fleet channels, which are more profitable than selling to car rental companies. [4]

For the month of June, Ford’s sales in Europe rose by 16%, faster than the industry wide growth rate. [5] When starting its restructuring in Europe in 2012, Ford announced plans of launching 15 new models by 2017 and these new models have been boosting sales for the company in the region. Sales of the new Ford Mondeo were up 55% for the month of June, while commercial vehicle sales(comprised mostly of the Transit vans and Ranger pickups) were up 33% for the first half of 2015. As a result, Ford’s market share has grown by 20 basis points compared to its market share last year.

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Notes:
  1. Ford Investor Relations []
  2. GMC Sierra is Best Improved in June 2015 as F-Series Struggles [Sales Report], The Fast Lane Trucks, July 2015 []
  3. Ford’s Europe sales rise 12.5% in first quarter, Detroit News, April 2015 []
  4. Ref: 3 []
  5. Ford’s (F) Europe Sales Rise in June and First Half of 2015, Zacks Equity Research(Yahoo Finance), July 2015 []