How Ford Is Having An Atypical Year in 2015

+15.77%
Upside
12.18
Market
14.10
Trefis
F: Ford Motor logo
F
Ford Motor

Ford Motors (NYSE:F) surprised investors by posting a strong 10.4% increase in pre-tax profits in the second quarter of fiscal 2015. [1] The interesting thing, however, was that the company posted this increase in profits despite a 6% decline in the sales of its most profitable product, the F-150 line of trucks. Ford has taken an initiative to launch a new version of its F-150 truck with an aluminum instead of a steel body. This will make these vehicles lighter, more fuel efficient and easier to handle and the company expects this to boost both sales and profits. However, the company had to shutdown its factories in order to retool them for manufacturing these new vehicles. As a result, supplies of the trucks at dealerships have been constrained and this has affected sales.  In the meanwhile, the company has concentrated on retail sales, which provide higher margins, cutting down on commercial sales. This led to an increase in the average transaction price for the trucks, though Ford’s profits are not completely attributable to this factor alone. Below, we take a look at what’s changed for Ford.

We have a $15  price estimate for Ford, which is slightly higher than the current market price.

Record Profits in North America

Relevant Articles
  1. With F-150 EV Production Cut 50%, What Lies Ahead For Ford Stock?
  2. What To Expect From Ford’s Q3 Earnings?
  3. Will Strong F-Series Sales Power Ford’s Q2 Results?
  4. Can Ford Stock Return To Its Pre-Inflation Shock Highs
  5. Higher Truck Sales Will Drive Ford’s Q1 Results
  6. Ford’s Q4 Results Were Tough, But Things Could Get Better

We have previously written about how 2015 is likely to be an atypical year for Ford. [2] Usually, the company posts most of its profits in the first half of the fiscal year as costs rise in the second half with new vehicle launches and model refreshes. However, in 2015, it is likely to be the reverse, especially as the F-150 did not contribute to the profits. Ford’s average transaction price on the F-150 trucks was around $3,000 higher than the second quarter of fiscal 2014. However, the company did not generate incremental profits on its truck sales, implying that overall volumes were lower, meaning that the higher prices did not translate into an increase in profit. Despite this Ford made $2.6 billion in pre-tax profits in North America, a record for the company.

Ford’s profit in the region was mostly driven by the sales of its two new SUVs- the new Edge and the Explorer. Both products saw sales jump during the quarter and resulted in solid increases in profit. This momentum has continued into July. Meanwhile, supplies of the F-150 have been growing and unit sales were up in July. F-series sales include the sales of the F-150 (around 70%) as well as its Super Duty models. F-series sales in July rose by nearly 5% in July on a year-over-year basis. [3]

Strong Second Half

We expect Ford to have a strong second half to the year. With supplies of the F-150 reaching optimal levels, and strong momentum of SUV sales, North America profits should be higher in the second half. Increased production capacity in China should have translated into higher sales in China, but the economic slowdown has complicated things somewhat. However, Ford has adjusted its spending in China in order to optimize its profits from the region. Ford operates in China through two joint ventures:  Chang’an and Jiangling. The former makes passenger cars and SUVs, while the latter makes commercial vehicles. Sales for both were down in July, but the latter was affected more. As a result, the company has changed its spending outlay in the region to make sure its profits aren’t affected. This worked in the second quarter, as the company posted a strong profit in the second quarter. Moreover, the company is also trying to capitalize on the boom in SUV sales in the country and added three new SUVs to its lineup in the region —  a five-passenger version of the Edge, a seven-passenger version of the Edge, and an Everest SUV. These new model introductions can increase sales and boost profits going forward.

In Europe, the company continues to focus on improving its mix. Sales in the retail and fleet channels, more profitable than rental and commercial sales, have grown to around 72% of total sales, around 3% higher than the industry average. [4] The introduction of the Ford Mustang should also help boost sales.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

 

Notes:
  1. Earnings Review: Record Profits In North America Boost Ford’s Spirits, Trefis, July 2015 []
  2. Ford Looks Set To Have A Strong Second Half In 2015, Trefis, July 2015 []
  3. Ford F-Series Retains July Sales Lead Despite Silverado Surge [Sales Report], The FastLaneTruck, August 2015 []
  4. Ford Europe sales up in May with new product on way, Detroit Free Press, June 2015 []