Is Ford Motor Company in Trouble?

Learn why Ford is making less money than it was before.

May 12, 2014 at 12:06PM

American automaker Ford Motor Company (NYSE:F) is making less money today than it was a year ago. The company recently reported a first-quarter profit of slightly below $1 billion, which represents a huge decrease from the $1.6 billion it made in the year-ago period.

The recent earnings miss has raised questions about Ford's ability to remain competitive in a fierce environment where rivals such as General Motors (NYSE:GM) and Toyota (NYSE:TM) use aggressive pricing strategies and high-quality standards to capture market share in North America and China. Moreover, on May 1 the company announced a surprise drop in April sales while other car manufacturers reported strong numbers. Is Ford in trouble?


Source: Ford

Analyzing the results
According to its latest earnings results, Ford reported that its profit had plunged 39% from the same quarter of last year.

On the top-line front, Ford's revenue slightly increased from $35.6 billion to $35.9 billion, enough to surpass the $34.54 billion in revenue that the Street was expecting.

It's all about market share
Although Ford's revenue managed to beat analysts' expectations, from a comparative perspective the company looks to be underperforming in its second quarter so far. This can be seen from its April monthly sales figures. On May 1, the company reported a year-over-year drop in sales of 0.7%, while the Street was looking for a gain of 3%.

This is particularly worrisome if we consider that all of Ford's major competitors saw improvements in sales, with Toyota and Chrysler reporting double-digit increases and General Motors reporting a 7% jump. Simply put, consumers left Ford in favor of Toyota, General Motors, or other manufacturers. 

Recapturing market share
To avoid another miss, Ford needs to both recapture market share in traditional markets and strengthen its positions in fast-growing markets.

To achieve this, the company is working on its Ford One plan, which aims at restructuring parts of its business such as its balance sheet and product development.

In terms of product releases, the company is launching 23 new models this year which include redesigned versions of the Ford Mustang, Ford Edge, and Lincoln MKC crossovers. Not surprisingly, Ford has targeted 16 of its new vehicles at its core North American market, where some consumers may have delayed their purchases until Ford releases the new models.

New Mustang

The 2015 Mustang. Source: Ford

The company should benefit from its strong brand reputation in China, which will help to increase its top line in the world's second-largest auto market. Through various partnerships and joint ventures, Ford is expected to exceed 1 million sales in China this year.

Notice that the introductions of five different Lincoln models in China by 2016 should help Ford to remain competitive against General Motors, which is very popular in Asia and sells roughly 100,000 Buicks per month in China.

As for Toyota, political tensions between Tokyo and Beijing likely had a negative effect on Toyota auto sales during the past two years. As a result, the Japanese giant is currently the sixth-largest auto maker in China by vehicle sales, well below General Motors. However, it plans to strengthen its market position by bringing 15 new car models to China by 2017. In the short run, both Ford and General Motors are likely to remain in better market positions than their Japanese competitors.

Final Foolish takeaway
Regaining market share won't be easy. The massive amount of new cars that Ford plans to release this year in key markets will probably help to improve its top line, but the company may see its profits fall again because product releases usually involve high marketing costs.

Because of this, the company may continue to deliver weak earnings in the short run. However, if the new product launches go well, Ford may become an interesting earnings story in the long run. At any rate, this transition year is likely going to be very interesting for the company. In terms of new product releases, this year will probably be one of Ford's most active in the past 50 years.

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Editors Note: a previous version of this article mistakenly included April sales results in relation to Ford's first quarter earnings. The Motley Fool regrets this error.

Victoria Zhang has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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