Why Aren't Ford's Sales Stronger?

Ford's (NYSE: F  ) sales have been just so-so at home but, under the radar, the company has a great global sales story brewing.

Through the first six months of the year, Ford's compact Focus was the world's best-selling car, out-selling the longtime leader, Toyota's (NYSE: TM  ) ubiquitous Corolla.

Its success is well-deserved. Like most other recent Fords, the Focus is an excellent car, and its global success is a strong testimonial to the strength of Ford's product-driven renaissance.

So why isn't the Blue Oval's great lineup selling better at home?

Ford seems to be losing ground to rivals…
Through July, Ford's year-to-date U.S. sales were up just 5.1% over the year-ago period. That's not bad, but it's well behind the 14% gain posted by the industry as a whole, and far behind the gains posted by key overseas competitors doing business here.

The outsized gains from Toyota and Honda (NYSE: HMC  ) haven't been a surprise, of course, as both saw their output clobbered in the wake of the March 2011 tsunami in northern Japan. But what about the 14.7% gains for Nissan, the 9.5% gains for Hyundai, the 34% gains for Volkswagen (OTC: VLKAY)?

This is a trend that looks set to continue. Analysts at TrueCar.com are forecasting a 9.5% year-over-year increase in U.S. sales for Ford in August -- nice, but far shy of the 17.2% gain they see for the industry as a whole. That's roughly in line with other estimates: Wall Street analysts polled by Bloomberg are forecasting an average 18% gain for the industry, but just about 8.5% for the Blue Oval.

What's going on? It's not the cars. Unlike rival General Motors (NYSE: GM  ) , which is in the midst of a massive product-line overhaul, Ford's current line of vehicles regularly rank at, or near, the top of most comparison tests. Aside from some complaints about the company's touch-screen control system, most reviewers – and plenty of car shoppers – have only good things to say about Ford's latest offerings. The success of the Focus around the world isn't a fluke.

So what's the deal?

…but here's why that's not necessarily a bad thing
The deal is that Ford isn't offering too many deals these days. Ford's spending on retail "incentives" -- those cash-back or cheap-financing deals, which are so often advertised on TV, have dropped sharply in recent months. And, unlike GM, Toyota, Honda, and other rivals, Ford has stayed away from "stair-step" programs that pay bonuses to dealers who hit aggressive sales milestones.

Those decisions have no doubt cost Ford some big sales gains, but this is a well-thought-out strategy. The "One Ford" plan that CEO Alan Mulally has used to revitalize the Blue Oval has a lot of parts, but one key principle is that Ford matches production to real demand, as Mulally often says. "Real demand," in Ford's view, is demand without the big incentives and heavy dealer bonuses that erode profit margins.

 Put another way, Ford's whole production and distribution system is set up and managed to make just as many cars and trucks as the company can sell profitably. While sales growth is always good, too much can actually become a problem of sorts: Earlier this year, Mulally said that North American production of several key models, including the Focus, was nearly maxed out.

That sounds like a good thing, but once a factory is maxed out, making more cars isn't simple. Big increases in production would involve investing in new factories or assembly lines. Those would be costly outlays for Ford, one that would require buy-ins from suppliers who are still wary after their own near-death experiences in 2009 – and one that would require a lot of confidence in the still-recovering U.S. economy.

The upshot: Watch profits, not sales
In the bad old days, market share was a huge priority and concern for the Detroit automakers. At least at Ford, that's not true anymore. While share is important, and watched carefully, the bottom line -- profit -- is what really matters.

Ford's profits in its home market have been strong. Despite concerns overseas that hit Ford's overall bottom line, its North American division returned strong profits again last quarter, with a fine pre-tax operating margin of over 10%.

Ford will incrementally expand its production as new models are introduced, and as economic conditions warrant. But as long as the company's plants are running at or near capacity, and as long as profits and margins continue to be strong, Ford executives are unlikely to lose too much sleep over sales gains that trail those of bigger spending rivals.

Ford's stock has been under pressure lately, dropping to levels not seen in years. But the company is still performing very well at home, and is investing heavily for growth abroad. Have these short-term pressures created 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. Click here to get instant access to this premium report.

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 General Motors and Ford. Motley Fool newsletter services have recommended creating a synthetic long position in Ford. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (9)

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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 August 31, 2012, at 9:08 PM, AmericanFirst wrote:

    Please be reminded that GM has suffered the largest market share this year 2.0%, despite being a leader in marketing incentives and sub-prime loans,

  • Report this Comment On August 31, 2012, at 11:52 PM, MARKETSURFER wrote:

    Bringing out great new autos and the bottom line are what matters. Market share can be bought to some extent with promotions and sub-prime lending. 31% of Hyndai's loans are sub-prime which is the most of any major automaker both domestic or foreign. Ford and GM's sub-prime percentages are pretty much in line with those of the foreign automakers. Apple has proved that margin and bottom line are what really count. Apple is not even close to being the biggest seller of I-phones or computers yet they have the highest market capitalization of any company in history because they make so much from the sales they do make.

    Ford is on the right track.

  • Report this Comment On September 01, 2012, at 4:18 PM, Analzethis wrote:

    First let's get the facts straight:

    1. The Focus is the best selling NAMEPLATE but not the best selling VEHICLE. Why(?), because the "Corolla" is sold with different names around the world. So while the Corolla NAMEPLATE (brand) is not the best selling it is the best selling VEHCLE by a wide margin. It's similar to the F-Series Truck ad that says it's the best selling truck for 30 straight years. Yes the F-series NAMEPLATE has outsold the Chevy truck for those years but if you combine the Chevy with the virtually identical GMC truck the GM twins outsold the Ford F-Series most of those years. Technically the Focus and F series are the best selling NAMEPLATES but not the best selling products.

    2. The production capacity discussion is a good one. Ford is doing a very good job of balancing capacity (relatively fixed) against demand by using the pricing as the variable. Comparing Ford's MSRP prices for each segment reveals that Fords prices are among the highest in nearly every segment. They simply use a combination of MSRP plus select incentives to balance capacity versus demand thus maximizing profit. B-school 101 stuff.

    3. Europe is a disaster for everyone but Volkwagen. Ford will lose well over $1B there this year and large losses are expected for the foreseeable future. It is a major overhange for the stock.

    4. Ford is adding capacity to China but they were very late to the party. They are a minor player in that market and it will take years to build market share.

    Don't get me wrong. Ford is a very well run company but like all companies it has it's warts.

  • Report this Comment On September 04, 2012, at 12:25 AM, Werdenfelser wrote:

    I am curious where you get the idea from that Ford spending on retail promotions is down drastically. According to Edmunds.com data, July 2012 incentive spending per vehicle was essentially flat yoy, and above the industry average (for the full spreadsheet, look here: http://static.ed.edmunds-media.com/unversioned/img/car-news/....

    Maybe the real problem for Ford remains with the quality issues that have hounded them for decades. According to NHTSA data compiled by Edmunds.com, Ford owners complained about safety issues with their cars at a rate that was higher than for any other Big 6 manufacturer; roughly twice that of GM owners, and more than three times that of Honda owners (adjusted, of course, for number of units sold). Data is here: http://static.ed.edmunds-media.com/unversioned/img/car-news/...

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