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Ford Bulls, Don't Ignore This Key Trend

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A lot of people have been jumping on the Ford (NYSE: F  ) bandwagon of late, and a few have been on it for quite a while, like our co-founder David Gardner. The company has certainly made a remarkable turnaround from the depths of total collapse as shares traded near $1 toward the end of 2008. Those who bought into the turnaround story early have made quite a hefty profit, with shares now trading over $13.

Many were excited by September's 41% increase in auto sales over September 2009. However, let us not forget that last September was the first month after the government's Cash for Clunkers program ended, and a victim to the sales pulled forward, resulting in a slower month. The favorable comparisons were not available in August, a month in which United States auto sales hit their lowest levels in the past 27 years. Auto sales fell from the July totals by about 5%, showing we have a ways to go before the new-car market reclaims its former glory.

Ford has been performing better than its peers and has been able to win important U.S. market share. The company's market share domestically is now 16.7%, up from 15.2% from the first eight months of last year. Ford in particular has been helped by Toyota's (NYSE: TM  ) manufacturing problems as well as the stigma attached to General Motors' government-funded bailout. Ford's sales have also been buoyed by giving higher incentives than the industry average. Incentives for Ford vehicles averaged $2,975, climbing nearly 6% in the face of an average industry decline of 1.6%.

Morgan Stanley is bullish
Another bullish party was heard from when Morgan Stanley analyst Adam Jonas initiated coverage on the stock Monday, naming it a "Best Buy" and putting a price target of $20 on the shares. The analyst believes that there is a real recovery in new automotive sales in America, and the company's domestic operations will lead its growth.

Jonas believes the additional availability of credit will boost the American consumer, increasing unit sales in North America to 14 million in 2011. This number exceeds consensus estimates of 12 million, and in my opinion is wishful thinking.

The real trend
Ford's turnaround is impressive, but I see another trend that could hurt Morgan Stanley's bullish sales predictions. The age of vehicles and the mileage put on a vehicle over its lifetime have been increasing significantly. The average age of passenger vehicles on the road has essentially gone in one direction since 1995, when the average age of a vehicle was 8.4 years. Today that number stands at 10.6 years. Vehicles are simply better-made today, resulting in a vibrant used market that resulted in consumers buying new autos less frequently. This is part of the reason we have seen an explosion in certified pre-owned dealership cars. Thrifty consumers realize that used cars provide much better values for consumers and businesses.

As thousands of dealerships have closed over the last couple of years, so have opportunities to fix and install original equipment manufacturer parts on cars and trucks. Much of this parts business has gone to aftermarket parts retailers such as O'Reilly Automotive (Nasdaq: ORLY  ) , AutoZone (NYSE: AZO  ) , and Advance Auto Parts (NYSE: AAP  ) , who then distribute aftermarket parts to independent garages or do-it-yourselfers. These companies give investors a chance to profit on this trend. O'Reilly is my favorite of the three.

The Foolish bottom line
The Ford story really is a great one, and CEO Alan Mulally has become an icon for the turnaround he's spearheaded. However, the greater story is the stubbornly frugal American consumer and car-buying trends that have not gone back to their old ways.

I still believe the best play in the automotive sector is a play on longer-lasting cars, and increasing sales in used cars. This continues to bode well for the automotive parts retailers mentioned above as well as aftermarket parts manufacturers such as Dorman (Nasdaq: DORM  ) or a specialty used car retailer like CarMax (NYSE: KMX  ) .

Are you still on the Ford bandwagon? Do you think the stock could run to $20 as the Morgan Stanley analyst expects? Let us know in the comments box below.

Andrew Bond owns no shares in the companies listed. Ford Motor is a Motley Fool Stock Advisor selection. CarMax is a former Motley Fool Inside Value selection. Try any of our Foolish newsletters today, free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2010, at 5:37 PM, ajants wrote:

    I think ford is a great buy at anything under 20.they have a great product and a great ceo.

  • Report this Comment On October 07, 2010, at 7:38 PM, kirksan1 wrote:

    We bought Ford a few years back, simply because of CEO Alan Mulaly. He did a good job at Boeing's commercial aircraft division & the folks there really seemed to like him (I interned at Boeing one summer). We bought into the leadership of the company & intend to hold for the next several years.

  • Report this Comment On October 07, 2010, at 7:55 PM, modeltim wrote:

    I agree with the caution expressed in the article. Ford is a very good company but they are in a lousy cyclical industry where overcapacity and a lack of demand are real threats to all players.

  • Report this Comment On October 07, 2010, at 9:48 PM, matthunt97 wrote:

    O'Reilly Automotive ------- be careful they sell many inferior parts through the Checker Auto parts stores....not in my car or truck for the most part.

    As for the long life of modern cars..just try to service one as a do-it-your-selfer....amazing frustration with the computer systems and electronics.

    And now for Ford...a decent company fighting a battle by trying to guess the future.. will they win? Maybe.

  • Report this Comment On October 07, 2010, at 11:50 PM, teentradeproject wrote:

    I have held Ford stock since the $2.42 gloom days. My target price has been 14 and I don't see it going to much higher than that. Ford is a great company and I'll continue to hold it for a while longer.

  • Report this Comment On October 08, 2010, at 7:16 AM, bevelegg wrote:

    Ford is doing a great come back. I have a few shares and I am going to hold and buy on the down side.

  • Report this Comment On October 08, 2010, at 11:39 AM, TMFMarlowe wrote:

    Good article, Andrew. When (or whether) the SAAR will return to the 15-16 million mark that was considered "normal" until 2008 (vs the 11-12 million it has been running at lately) is THE question when looking at automakers whose primary market is the US.

    The thing about Ford is this, though: They've gotten their fixed costs down to the point where they're making a lot of money at a <12 million SAAR. If sales stay at current levels, they'll continue to make a lot of money, pay down debt, invest aggressively in new product, etc. And if sales return to historical norms, they'll make a WHOLE LOT of money.

    @modeltim: A lot of that 'overcapacity' went out the window with the GM and Chrysler bankruptcies and Ford's restructuring, at least in North America. Ford's capacity is about where it needs to be. Overcapacity is still a big issue in Europe, and globally, but not so much here, not anymore.

    John Rosevear

  • Report this Comment On October 08, 2010, at 6:47 PM, Varchild2008 wrote:

    Don't forget that FORD no longer is in the market exclusively to just manufacture and sell cars.

    They now have the following diversified lines of revenue:

    1) FORD SYNCH: Which has resulted in customers bringing their cars into the dealerships to upgrade their vehicles to Ford Synch or to the latest and greatest APPs.

    2) FORD Quick Lane continues to grow and grow acting as a place to shop for Car Batteries and other auto parts.

    Bottom line: You can't ignore Ford Synch for its "I want to upgrade" type revenue. This increases profit margins.... It turns 1 customer into a returning customer over and over to put in more "goodies" into his/her vehicle.

  • Report this Comment On October 08, 2010, at 9:27 PM, baldheadeddork wrote:

    Andrew, where's your reference for Ford's average incentive climbing vs a decline for the industry? I follow the Edmunds TCI numbers closely and they've painted a much different picture through 2010. There have been fluctuations, but Ford's incentives have run in a $200 range for the entire year. I have a hard time believing the industry as a whole is down 1.6% when the largest and third-largest makes in the US have set all-time records for their incentives this year.

    Your analogy between average vehicle age and a negative effect on new car sales is shaky.Average wholesale prices for used cars (how the value of the used car market is measured) has been running at record highs for all of this year, and this has historically been a leading indicator of increased new car sales.

    There's also a flaw in your logic claiming the chance of ongoing depressed sales numbers because cars are so much better these days. Has this huge quality improvement happened in just the last three years? Was quality so horrible in 2006 when a almost 17 million new cars were sold?

    Few people buy a new car because their old one literally wore out. New car customers are motivated by want much more than need.

  • Report this Comment On October 10, 2010, at 4:32 AM, nivekluap wrote:

    Prediction: Today's Ford is Peter Lynch's Chrysler (One Upon Wall Street). You might not have bought it at $1.00 ,but there is upside to the company and it's profits....and hardly any of the "herd" is bullish yet which will drive the price of the stock to WAY overvalued. Might even bring the dividend back some day.

    Long on F


  • Report this Comment On October 19, 2010, at 1:17 PM, adam1900 wrote:

    Ford has the same big dollar problems as GM & Chrysler had with union wages at their peak and retirement outflow costs bearing down on them. They are selling everything in an effort to look good to the markets and stay afloat. Their time is running out. $20..00 a share? Are you kidding me? Sell baby sell. Nothing but big debt ahead in a down economy.

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