Why Ford Motor Company's Recovery Might Be At Risk

Ford is launching 23 new products and focusing on a European recovery while sales in the U.S. have been declining in recent months. Investors should be cautious.

Jun 12, 2014 at 8:34AM

This year did not start out so well for Ford (NYSE:F) even though the company posted a great performance last year.

In January, Ford sold 154,644 vehicles in the U.S., which represents a 7% drop from 2013's 166,501 vehicles. In February, the company sold 183,947 vehicles in the U.S., which represented a year-to-year drop of 6%. In March unit volume was up by 3%, and April saw another sales decline of 1%. Basically, Ford posted year-to-year declines in three out of the first four months of the year, while GM (NYSE:GM) performed better by increasing sales in two out of those four months, and Toyota (NYSE:TM) posted much stronger results. In other words, Ford lost market share to its major competitors in the first four months of the year. 

Seemingly, Ford is having a hard time with growing its sales in the U.S. Even as the car industry in the country is experiencing a recovery, there is so much competition that it is becoming increasingly difficult for any one company to gain market share in this environment. In the first quarter, Ford increased its unit volume by 6% while the company's revenue only increased by 1%, which tells us that the company is selling more of the cheaper cars and less of the more expensive cars. This might be troublesome for the company if the trend does not reverse soon.

Ford may be losing its focus by focusing on too much at a time
In the last couple years, Ford put a lot of focus on Europe where it was suffering large losses due to the recession. In fact, the entire car industry has been suffering greatly in Europe since 2007. Recently, Ford made a great progress in Europe and reduced its losses while improving its revenues; however, the company is losing its focus in the U.S. while accomplishing great things in Europe. Meanwhile, the company is showing mixed performances in Latin America and growing strongly in Asia (mostly driven by mainland China). In the markets where Ford is posting stronger unit growth, most of the growth comes from smaller cars like Ford Fiesta (especially in Europe and China) because there is a shift in these regions for more fuel-efficient vehicles. On the other hand, these vehicles do not bring in as much money as SUVs or pickup trucks for the company.

New products come with new costs
Last year, Ford said that it would launch 23 new products globally and product launches of this size usually result in huge start-up costs. It takes a lot of money to design, engineer, and create new products in the car industry because a car company has to redesign much of its product lines in order to fit the new products. This can be extremely costly and eat into a company's profits. In fact, Ford's cash flow in 2014 will be significantly lower than the company's cash flow in 2013. This year, Ford expects to generate $7 billion-$8 billion in operating income, down from last year's $8.8 billion. The difference is all about launching new products. Perhaps Ford is launching too many products at once and taking on too much risk, but time will tell whether this is true or not.

Future of car sales look better
While car companies rarely gain or lose any meaningful market share (due to the intense competition within the industry), the overall market is expected to expand and this should affect most car companies positively. It is nearly impossible to predict a company's future sales and earnings, but it would be very surprising if Ford's sales growth in Europe and China came to a halt anytime soon. Similarly, as Americans replace their aging cars with newer and more fuel-efficient ones, Ford will be one of the companies to benefit from this. GM and Toyota have been benefiting from this trend for the last few years and these companies are already well-established in Asia where Ford can be considered a newcomer. 

This will be the first year that Ford will be generating more than $150 billion in revenues since the recession of 2008. If the launch of the new models through this year are successful, then 2015 might be the most profitable year in Ford's history. If things do not work out so well and the customer reception to these new models is not very good, things can go very bad for the company. Ford operates in a low-margin business that carries a high risk and small changes in the company's revenue mix could cause big changes in margins and overall profitability of companies. This is why investors would be well advised to do more research and pay attention to sales projections in the coming months. Currently both Ford, GM, and Toyota look attractive with single-digit forward P/Es, but this can always change if a new product launch does not work out. Being cautious is always the key.  

Warren Buffett's worst auto nightmare (Hint: It's not Tesla)
A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

 

Frank Laagland owns shares of Ford and General Motors. 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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