Why Ford Motor Company's Stock Crashed, and Why You Should Be Thrilled About It

The Ford Atlas concept was said to be a preview of the all-new F-150, set to launch next year. The costs of launching new products like Ford's pickups will weigh on 2014 profits, the company said this week. Photo credit: Ford Motor Co.

Ford (NYSE: F  ) investors had a rough week.

Shares of the Blue Oval dropped over 6% on Wednesday -- the biggest one-day drop for Ford stock in two years -- and fell further on Thursday, after the company announced that next year's profits would likely fall short of Wall Street's expectations.

That seems like bad news. But is it time to sell your Ford stock?

It might be an opportunity to buy more. Here's why.

Launching a new vehicle is an expensive proposition
Ford CFO Bob Shanks said on Wednesday that the company's pre-tax profit would be about $8.5 billion in 2013, a roughly $500 million increase from last year. That was good news. But Shanks also said that profits next year would fall, likely to somewhere between $7 billion and $8 billion.

That wasn't good news. Investors want profit growth, not declines. That led quite a few to sell Ford stock right away. 

But for those who are looking at Ford as a long-term investment, I'd argue that it wasn't bad news when you hear the details. Shanks explained that Ford is launching a lot of new models next year, 16 in North America alone, and costs related to those launches will be a big reason for the decline. 

The 2015 Ford Mustang is one of a slew of new Fords that will arrive at dealers next year. Photo credit: Ford Motor Co.

That's more than three times the number of launches Ford will have done in North America in 2013. And it includes all the variations of Ford's biggest-selling and most important product, its F-Series pickup line.

New-product launches should lead to greater profits in the long run. Ford's new trucks should make more money for Ford than its current pickups. But in the near term, launching those new products is expensive. Really expensive: Just the tooling required to produce an all-new model can account for as much of a quarter of its total cost, $200 million or more. 

Add in logistics costs, the massive cost of a big advertising push for something like an all-new family of pickups, and so forth, and you can see that a new-product launch can be very expensive.

Discounts on the old products also add up
Those aren't the only costs involved. While you're spending big to introduce the new product, you're making less money on the old ones. Inventories of the outgoing products are generally sold off at a discount. That hurts profit margins. When you're talking about Ford's most profitable and best-selling product, the F-Series trucks, those discounts will mean a big hit to the bottom line.

Just look at what rival General Motors (NYSE: GM  ) went through when it launched its all-new Chevy Silverado and GMC Sierra pickups this past year. Huge numbers of old trucks sold off at massive discounts, and a slow ramp-up of sales for the (better, more profitable) new trucks. 

GM's launch of the new 2014 Chevrolet Silverado was a success, but it wasn't cheap. Photo credit: General Motors

The upshot: GM sold fewer trucks than it could have, and it sold many of those (the old ones) at steep discounts that got even steeper as the year went on. That added up to a big income hit for GM.

And here's the thing to remember: GM's launch went impressively well. If Ford does as well as GM did, it will be doing quite well.

These launches are key to Ford's long-term success
New products like the next F-Series are critical to sustaining Ford's momentum over the next several years. Their success is essential if Ford's stock is to realize the gains that investors are hoping to see.

Ford's remarkable renaissance, and the boom in the price of Ford stock, over the last few years has been driven, more than anything else, by its much-improved products. Cars like the Focus and Fusion are serious contenders with the best of the import brands, a first for Ford.

Think about Ford's recent streak of product successes. The Fusion and Escape last year, the Focus and Explorer before that, the Fiesta, all strong products that were big improvements on the vehicles they replaced -- and that have competed well with Toyota (NYSE: TM  ) and the other import brands. 

Together, those products have done more than anything else to improve Ford's standing -- and to raise its profits (and the price of Ford stock). Next year brings the new trucks, along with an all-new Mustang, the new Lincoln MKC SUV, and other new vehicles that Ford has yet to announce. 

It'll cost Ford big bucks to launch all of those new products. What Ford said this week is that those costs will add up in the near term. But they're a critical part of Ford's unfolding story.

Long-term investors in Ford stock -- full disclosure: I'm one of them -- need not be too concerned.

One last note
I'll end with a quick reminder. 

Back in January, Ford reported those strong full-year earnings for 2012, along with a fourth-quarter result that beat Wall Street's estimates. 

But Ford stock fell almost 5% on the news. Why?

It's because CFO Shanks said that Ford could lose as much as $2 billion in Europe in 2013. That was worse than some on Wall Street expected, and it led to a big sell-off, just as we saw this past week.

But here's how that played out: Ford's turnaround plan in Europe started to take hold over the course of 2013. Ford Europe will lose money for the year, but less than expected. 

I said at the time that Ford was still a buy. That argument looks pretty good in retrospect. Even with this week's losses, Ford stock is up over 18% since I wrote that article. 

I think all the reasons I gave in January for buying Ford remain true. It remains a great story, and it'll still take a few years to play out. 

But next year could be a little bumpy. Use those bumps wisely.

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Read/Post Comments (11) | Recommend This Article (45)

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 December 22, 2013, at 3:21 PM, Ostrowsr wrote:

    So Amazon invests for the future and they see record highs. Ford does it and loses 10%? Strange logic.

  • Report this Comment On December 22, 2013, at 3:40 PM, ScamuelJones wrote:

    NOPE! Ford's stock is falling because they started makikng crappy cars about five years ago just like the I bought! I will NOT ever buy another Ford of any kind!

  • Report this Comment On December 22, 2013, at 10:46 PM, Jeffkory wrote:

    I worked for a ford dealership as a mechanic 16 years- I couldn't ever own one- ever.

  • Report this Comment On December 23, 2013, at 3:49 AM, pinguinobc wrote:

    Frankly, this is not a very persuasive argument for buying or holding Ford. So Ford is up 18% since you recommended it back in January? That is way behind the S&P 500. I bought both Ford and GM one year ago. GM is up 42% since then.

    No one can predict the future. But if you think 2014 will be bumpy, why not just take your profits now and ride out 2014 and then invest again in 2015?

  • Report this Comment On December 23, 2013, at 6:56 AM, kca124cain wrote:

    a 6% drop is a "crash"??? Is the author a nut?

    In 2008, when Cramer recommended it, it was at $6, then it dropped below $2. That was a crash.

    It is still up 15% for the year.

  • Report this Comment On December 23, 2013, at 10:42 AM, dennypat38 wrote:

    JOHN you FORGOT to say that GM and GMAC took 35 BILLION from BUSH ADM and still owe 80%. Also they are 70 BILLION UNFUNDED IN THEIR PENSION FUND HELLO. And the Gm C. E. O. FEELS THEY DO NOT HAVE TO PAY ALL THE MONEY BACK 40 BILLION.

  • Report this Comment On December 23, 2013, at 1:37 PM, PaulOmaleki wrote:

    Ford motor company needs to stand behind their warranty. for Example ; I bought a 2006 ford F-250 Turbo Diesel and paid full retail price and on top of that I bought extended warranty. I had turbo issue at 3000 miles and I took my truck back to dealer and every time I got a run around and they told me there is nothing wrong with the turbo and I ask why the check engine light comes on and I get a under boost turbo code. This problem happened four times and finally my warranty expired. I went back to the dealer ( Fremont Ford in Bay area) and the service advisor told me that I need anew turbo. I ask to look up the previous record with an on going problems. Bottom line he told me Ford will not honor the warranty. I will never buy another Ford as long as I am in business.

  • Report this Comment On December 23, 2013, at 3:19 PM, SkepikI wrote:

    JR: Excellent advice. I plan on adding F shares if they go under 15. I have all the F I want for now at P/E 11 and change, under 3% div. My mind changes somewhere nearer 10 and 3%, largely because of my need for income and capital preservation. Bonds won't do it at least this year, and maybe next.... that's and ongoing torture chamber I will not participate in. BUT F and a few others paying 3 or 4% as well as on a tear to be better....well that's a long term story I WILL participate in.

    Long F, the taxpayer's friend.

  • Report this Comment On December 23, 2013, at 6:54 PM, seatest wrote:

    Every time I buy an American car, it has a problem so I go Japanese, and I keep hearing "American cars are better now." So I go back to buying an American car and find out it still sucks. So now I hear that American cars are competitive. I won't fall for it again. I'd love to buy American but can't. Now I have two Hondas and one Toyota. My next car will be a Honda. They hire engineers not marketers, finance people, or lawyers. They are focused on making things better. All my small engines (lawn mower, outboards, and power washer) are Honda engines. They never quit. I have a 2004 Odessey mini van with 200,000 miles on it. I never did anything but routine maintenance. For Ford the best part of the business cycle is coming to an end. I do not see growth accelerating. They have to invest heavily just to stay even. I was in, now I'm out.

  • Report this Comment On December 26, 2013, at 1:59 AM, a1alden wrote:

    I've been Ford positive for a very long time. Yep, not every model has been on top but, for a company I purchase lots of Ford trucks and they just never have any problems if maintained properly....except some of the 6 Lt. Diesels in SD trucks and even then, those once fixed just worked. Ford has never had a hand out and Ford takes great care for the customer. Ford has great gas milage vehicles and the darn things last forever if you change the oil and filters. The future looks bright and of all the auto companies.....Ford looks solid. Better than the rest.

  • Report this Comment On December 27, 2013, at 2:20 PM, Spasticdog wrote:

    I don't see how Ford has stayed afloat this long with all the crappy vehicles it has been producing. I have a 2011 mustang with transmission problems now, been in shop 9 times still does same thing and still under warranty with 23,000 miles. Ford says it all normal and my driving habits, yeah right! Customer service is a big three ring circus! Very rude and non helpful! Contacted BBB but Ford pays them so what's the use! I WILL NEVER BUY ANOTHER FORD AGAIN! I hope they go under! Buy the way FORD.....your new 2015 mustang looks like crap! That design alone will do you in! FORD SUCKS!!!!!!!!!!!!!!!!!!!

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