Will Slipping Sales Hurt Ford's Profits?

We won't know for sure until June's official results are released next week, but early signs suggest that U.S. auto sales have slowed a bit from the hot pace seen earlier in 2012.

They're still pretty hot, though: While total sales are expected to be down substantially from last month, analysts at TrueCar.com are predicting that this will be the best June for new-car sales since 2007.

While the big story will be the resurgence of Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) , and a big push by Volkswagen, early signs suggest that Ford (NYSE: F  ) may be slipping a bit.

At first glance, a strong month -- but look deeper
TrueCar.com expects overall U.S. auto sales to be up about 18% year over year -- but that's a figure that should come with some caveats. At this time last year, Toyota and Honda were facing severe shortages of new cars thanks to production disruptions in the wake of the March tsunami that devastated northern Japan. That led to big surges in sales for the likes of Ford and General Motors (NYSE: GM  ) -- and both were able to get premium prices for their vehicles thanks to competitors' short supplies.

Long story short, high prices and short supplies made last year's numbers lower than they might have been, making year-to-year comparisons look quite rosy. A fairer comparison might be to last month's numbers -- and there, TrueCar's projections suggest an almost 7% decline.

TrueCar expects all of the major players to show declines from May's totals. As I mentioned, Toyota and Honda will probably post huge (50%-plus) year-over-year sales gains, with Toyota's U.S. market share surging to a close third place behind GM and Ford. TrueCar also predicts a big gain for VW, in the 25% range, as the German company continues its aggressive push to expand its presence in non-European markets.

All those gains are coming from somewhere, of course, and TrueCar's estimates suggest that quite a few of them are coming from Ford. But that might not be all bad news for Ford shareholders.

Why slipping sales might not be bad for Ford
For years, Detroit CEOs obsessed over tiny shifts in U.S. market share. But current Ford CEO Alan Mulally doesn't play that game: He's -- properly -- much more concerned about the company's margins and overall profits than he is about a few points in share gained or lost versus GM or Toyota. Having somewhat fewer sales but bigger profits is a tradeoff he's willing to make.

Think about that while you ponder some grim-sounding forecasts: TrueCar sees Ford's June sales coming in essentially flat versus last year's -- which implies a drop in the Blue Oval's U.S. market share from 18.4% a year ago to 15.6% in June if these projections hold. Worse, TrueCar sees Ford's market share falling notably from last month's 16.2%. What's going on?

Probably a few things. Ford has said that production of its most popular vehicles is maxed out -- while the company plans to boost production of hot models like the Focus and Explorer, those increases won't show up at dealers until later this year. That has made for short supplies at some dealers and might be leading some consumers to choose other vehicles over waiting.

But here's the part that should reassure shareholders, at least somewhat: Ford's spending on incentives -- those "cash-back" or "zero-percent financing" deals one sees advertised -- has fallen sharply. The Detroit automakers have long had the highest incentives, but Ford's have fallen sharply in recent months -- to $2,489 per vehicle in June, TrueCar estimates, right around the industry average.

For comparison, GM and Chrysler are both spending more than $3,000 per vehicle, TrueCar estimates, while Nissan's (OTC: NSANY) spending may have surpassed Ford's, and VW and Honda are close behind. That's a sea change for Ford, and while it probably reflects Ford's own supply limitations in part, it's also an outgrowth of the desirability of the Blue Oval's current product line.

The upshot: It's not time to worry about Ford yet
Even if Ford's market share is falling a bit, the extra $500-plus it's pocketing on every sale is likely to keep the company's second-quarter profits strong. U.S. auto sales are Ford's "engine," to use Mulally's term -- while Ford sells vehicles all over the world, much of the company's revenues (and profits) are generated right here at home.

While nobody likes to see sales slip while competitors make gains, the real results that matter are Ford's second-quarter earnings, which will be out next month. That'll tell us whether Ford needs to step up its sales pace -- or whether Mulally's grand vision is bearing fruit.

It's worth remembering that Ford has been performing incredibly well over the past few years -- it's making good vehicles, is consistently profitable, has recently reinstated its dividend, and has done a remarkable job paying down its debt.

But even so, Ford's stock price is down 19% over the past year. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Get instant access to this premium report. Or if you'd rather take a look at a high-growth company outside the cyclical manufacturing sector, check out our special free report, "The Motley Fool's Top Stock for 2012," which features a company our chief investment officer uncovered that's revolutionizing commerce in Latin America.

Fool contributor John Rosevear owns shares of Ford and General Motors. Follow him on Twitter at @jrosevear. The Motley Fool owns shares of Ford. Motley Fool newsletter services have recommended buying shares of Ford and General Motors and creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (3)

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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 June 27, 2012, at 3:42 PM, mikecart1 wrote:

    The only thing slipping from Ford and GM and other American cars is their designs. They need to fire whoever has final say of their designs and find someone with creativity that makes sense and create some affordable streamlined cars for once. Toyota nailed it with the Scion brand. All the cars fit a large group of consumers and the cars are considered somewhat modern and streamlined and smooth aerodynamic looks and attractive customizations. Every time I see a Ford Taurus, the old ones with the oval rear window, the nasty back, and boat shaped body that extends out like a curve near the doors, I wonder who got paid and how much to create such a disgusting design.

  • Report this Comment On June 27, 2012, at 7:38 PM, sharpx2 wrote:

    Geez, I think both Ford and GM deserve a bunch of credit for their latest designs. After owning an extensive list of anything-other-than-American cars for decades, I shopped around when it was time for a new machine, and ended up with a Focus SEL, not out of patriotism but rather because it was the best car for the money. It looks great, handles great, and actually delivers its EPA fuel numbers, which are terrific. The Cruze over at GM has been very well received, and the upcoming Dart will put Chrysler squarely into the same market. I think it is time to accept that the USA can build and design some very competitive and attractive machines, regardless of the misdeeds in past eras. There are plenty of old, ugly cars - - I suggest you study the hideous creations of Hyundai from not so many years ago as a prime example. Everybody comes down the learning curve, some faster than others. Too bad it took driving over a financial cliff for GM and Chrysler to come to their senses. At least Ford has done it on their own and should be commended.

    More germane to Ford's prospects: take a look at what is coming this year: the new Escape and Fusion (both with hybrid configurations,) another pure hybrid model, and more. I am very confident that their market share will be improving strongly by the time all their (already-in-the-pipeline) 2013 models hit the showroom floor.

  • Report this Comment On June 27, 2012, at 9:56 PM, Fonz56 wrote:

    Take the name plate off a car and 80% of the people wouldn't know a min-iMercedes from a Hyundai. Performance and reliability are more important to me then ego. Personally think Detroit offers both.

  • Report this Comment On June 28, 2012, at 7:32 AM, TMFMarlowe wrote:

    @sharpx2: You're right on. The challenge -- more so for GM, but also for Ford -- is in overcoming those existing anything-but-Detroit biases. It's happening, but it'll take time.

    On the other hand, that's part of what makes F such an intriguing stock to own.

    Thanks for reading.

    John Rosevear

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