3 Reasons Ford Motor Company's Stock Could Fall

Ford's Explorer SUV has posted big sales numbers in the U.S. recently. But U.S. sales growth could be peaking, and that's one factor that could hurt Ford's share price. Source: Ford Motor Co.

Is Ford (NYSE: F  ) stock headed for a fall?

Ford's stock has had a terrific run since the dark days of early 2009, when it was trading for less than $2 a share. 

But every run comes to an end, sooner or later. Or put another way, every company faces risks that could knock its business off course. 

To be clear, I'm not saying that it's time to sell your Ford shares right now. (I own Ford stock and I have no plans to sell. If and when that changes, I'll tell you.) 

But if you're a Ford investor, or someone whose business depends on the company, it's worth keeping a close eye on the things that are most likely to hurt the company's bottom line -- and its share price. Here are three big ones.

Risk one: Are we reaching Peak Auto?

Rising U.S. auto sales have helped drive big gains for Ford's profits (and its stock price) over the last few years. In fact, Ford's strong profits in the U.S. have helped carry the company while it restructures in Europe and invests in an aggressive expansion in Asia.

But how much more growth is there to be had? Consider this chart, which shows U.S. sales of "light vehicles" -- cars, pickups, and SUVs -- over the last decade.

Source: Automotive News (historical figures), Edmunds (2014 estimate).

As you can see, the economic crisis clobbered new-vehicle sales. We've since had a nice recovery, and the growth is continuing. Edmunds estimates that U.S. light-vehicle sales will total about 16.4 million this year. 

But that's not far from the peak of 16.99 million that we saw in 2005. How much growth is left? 

It's not (yet) clear that the U.S. market is peaking. But recently we've seen some signs that it might be. After growing over 13% in 2012, and another 8% in 2013, the U.S. light-vehicle market is up just 5% this year through July. 

Meanwhile, automakers' incentives are rising, and analysts have expressed concern about the increasing average length of new-vehicle loans (72 months has become very common).

If history is any guide, slowing growth in the U.S. vehicle market will lead automakers to boost incentives -- using discounts to get the biggest possible share of customers who are willing to buy. If and when that happens, Ford will have a tough choice: increase incentives or risk losing sales.

Either way, its bottom line -- and its share price -- will take a hit.

Risk two: The all-new 2015 F-150

Here's a chart that shows just how much of Ford's profits came from its North America business unit last quarter.

Source: Ford Motor Company.

The details differ from quarter to quarter, but the proportions have been pretty much the same for a few years now: Most of Ford's profits are coming from North America.

I don't have a chart that shows how much profit each of Ford's products is generating, because Ford keeps that information secret. But it's no secret that a big chunk of Ford's profits in North America come from the F-Series pickup line, the hot-selling F-150 and its Super Duty siblings.

The F-Series is America's best-selling vehicle, and it's Ford's most profitable product. That makes the all-new 2015 F-150 a very important new product for the Ford Motor Company. 

But Ford is making a big gamble: The new F-150 features aluminum body panels, a first for a full-size American pickup. The new F-150 will weigh much less than the current trucks; the weight savings is expected to bring significant gains in fuel economy.

The all-new 2015 Ford F-150, shown in top-of-the-line Platinum trim. The 2015 F-150 Platinum will start at $50,960. Source: Ford Motor Company.

That raises two concerns for Ford investors: Will buyers accept the new aluminum F-150? And will Ford be able to build it as profitably as its current trucks?

The first concern is probably not something to worry much about. Some buyers might wait a bit to see how the new trucks are received, but Ford has clearly done its homework around this product. I've talked to several senior Ford executives about the new F-150, including CEO Mark Fields and North America chief Joe Hinrichs, and I can tell you that they are all very confident that customers will like the new F-150.

They think they've got a winning product -- and given Ford's longtime success in the pickup market, I think they deserve the benefit of the doubt.

But will the new trucks be as profitable as the outgoing models? Pound for pound, aluminum is a lot more expensive than steel, and making aluminum-bodied vehicles requires Ford's two truck factories to adopt different processes and tooling. 

There's a good chance, in other words, that these new trucks will cost more to make. But -- at least on the lower trim lines that account for the majority of F-150 sales -- Ford's price increases have been very modest. Will Ford make less money per truck on the new F-150?

We'll see. It's possible that Ford will make up the difference with greater sales of higher-profit premium models, like the Platinum edition shown in the photo above. It's also possible that Ford will boost prices across the board once the new truck is established in the market. 

But it's also possible that Ford's profit margins in North America will get squeezed a bit, at least for a while, and that could hurt the stock price. 

Risk three: Disruption overseas

A big part of the bullish case for Ford stock rests on its overseas efforts -- specifically, on its aggressive restructuring in money-losing Europe, and its ambitious expansion in Asia.

Ford Europe lost $1.75 billion in 2012 and another $1.6 billion in 2013. Ford has warned that it will post another loss in Europe in 2014. But that loss is expected to be smaller than last year's, and Ford expects to turn a profit in Europe in 2015.

Here's the story in a nutshell: Deep recessions in many parts of Europe have clobbered new-car sales. But Ford launched a major restructuring effort in the fall of 2012, one that is very closely modeled on the "One Ford" strategy that has been so successful in North America.

If it works -- and right now, signs are that it's working well -- that will mean a significant gain for Ford's bottom line. (If Europe had broken even last year, it would have increased Ford's global pretax profit by almost 19%.)

Meanwhile, Ford's Asia-Pacific region isn't generating huge profits right now, but that's because a lot of its earnings are being reinvested in an aggressive growth plan. Right now, Ford has five factories under construction in China and India, the last phase of an expansion that is expected to cost nearly $5 billion when all is said and done.

Ford launched the Mondeo in China last year. The Mondeo is a locally made version of the midsize Fusion sedan. Sales have been brisk. Source: Ford Motor Company.

Ford's sales in China have been booming: They rose 35% in the first half of 2014, far outpacing the overall market's growth. Chinese consumers clearly like Ford's current product formula, and all signs are that Ford will be able to keep those new factories very busy for some time.

So what's the risk here? The risk is this: that one (or both) of these efforts doesn't generate the profits we expect.

To some extent, success in Europe and Asia is already baked into Ford's stock price. That's because Ford's management has shown that they can execute well and because all signs so far have suggested that both efforts are solidly on track.

But both face external risks, starting with political and economic risks in both China and Europe. If either effort goes off course, Ford's stock price will suffer.

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Read/Post Comments (7) | Recommend This Article (4)

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 August 26, 2014, at 3:23 PM, bigsnooze1 wrote:

    pure B S

  • Report this Comment On August 26, 2014, at 3:56 PM, SkepikI wrote:

    <To some extent, success in Europe and Asia is already baked into Ford's stock price.>

    JR, the qualifier "To some extent" sort of lets you off the hook (that I was dragging out for you till I read it again) But this seems unsupported and unsubstantiated. If you think this about Ford's PE and price, what can possibly lead you to be optimistic about GM's? whats "baked into that" bunny rabbits and rainbows?

    If Ford were pushing P/Es about double and dividends about half, I might well agree with you....but not where they are at today.

    Ford management despite its sterling execution record in the past 5 years has been under appreciated for a long time and continues. If it gets abused in the inevitable correction, I am buying more.

    Long F, the taxpayer's friend.

  • Report this Comment On August 26, 2014, at 8:01 PM, timlonely wrote:

    New F150 with its fuel economy is a good reason for many to dump their old truck and replace it in the same way the airline industry is replacing old airplanes with new the new fuel efficient ones.

    If Ford has to discount their F150 then other manufacturers will have to do it too. After the discount is done, what's left? Cost of operating the truck: fuel efficient = saving money.

    China and India are rising and shouldn't be underestimated.

    If there is no growth ahead then all auto manufacturers are on the same boat, not just Ford.

  • Report this Comment On August 27, 2014, at 7:28 AM, tharbold wrote:

    I'll try to put this gently, but I've clicked through several of JR's 'articles' recently since he seems to be focused on several of the companies I own. JR must have a template that guides his writing as almost every article I've read follows the same formula. A sensational headline "<X> Reasons <Company Name>'s Stock Could Fall" followed by a short list of said companies current strengths and/or advantageous business conditions and tacked onto the end of each item in the list is a short tag line that reads " .... and if that stops working or changes it could affect the companies stock price".

    Disappointing writing at best that contains a lot of "if's" and much that is apparently conjecture. I find it hard to believe these supports the Fool's purpose "To help the world invest. Better." - unless sensationalized, click-bait headlines and insubstantial, formulaic articles somehow help the world to invest better?

  • Report this Comment On August 27, 2014, at 6:28 PM, sharpx2 wrote:

    One more thing: no commentator I have run across has mentioned the new 2015 Mustang, which will not only be a run-away hit in the USA, but also allows Ford to sell the Mustang in international markets, since it incorporates things that have been standard fare in Europe and elsewhere for decades, like independent suspension all around. It is beautifully designed. Between the F150 Aluminum and the Mustang, I fully expect Ford to put up record earnings in the coming quarters.

  • Report this Comment On August 28, 2014, at 12:52 PM, TMFBos wrote:

    @tharbold

    Hello,

    Wanted to let you know these article series are meant to help the Fool build out consistent company coverage and do not reflect all of our content. We certainly will still provide the normal Foolish coverage, but we need coverage on popular companies that helps new & old investors get up to speed on the basics.

    So the articles you've been seeing are part of that effort. We have 5:

    -Earnings Recap

    -Conference Call Recap

    -Reasons a Company Stock Could go up

    -Reasons a Company Stock could go down

    -Is it time to buy this company's stock

    So a new investors gets an up to date look at the companies operations (recap & call), an article explaining business opportunities, an article on business risk, and a final article on what the author thinks of the company's stock at that point in time.

    Sorry we haven't been transparent on this, but we should have a better system to make this clear in the near future.

    I promise we haven't turned into template writing robots :).

    Cheers,

    Blake Bos

    The Motley Fool

  • Report this Comment On August 29, 2014, at 4:19 PM, TMFMarlowe wrote:

    @tharbold: I've written exactly two articles along those lines, so I'm not sure what else you're attributing to me. There will be two more in a week or so -- for General Motors -- and then that's it from me. (Why? Because my editor -- that'd be Blake, who commented just above -- asked me to.)

    I took some time off in August, but I generally average 40-60 articles a month. If you think two is "almost every article", you need to look a bit more closely.

    I'll also say this: If you think a 1400-word in-depth article that references several interviews I've conducted with senior execs at Ford is "insubstantial" "click bait"... well, I'd like a link to the free content you're reading that you think is so much better, because I'd like to be reading it too.

    John Rosevear

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