Ford Motor Company (NYSE:F) is idling four of its North American factories in response to swelling inventories -- including one of the two factories that makes its top-selling F-150 pickup.
It's the latest hint that the U.S. new-vehicle market could be near or past its cyclical peak. That should concern investors in all automakers doing business in the United States.
Key Ford factories are getting some unwelcome downtime
Ford's typical practice is to idle a factory for a week when inventories of the factory's products are piling up (or put another way, when sales aren't keeping pace with production). Two Ford plants in the U.S. and two in Mexico are getting some surprise time off:
- Louisville Assembly, in Louisville, Kentucky, builds the Ford Escape and Lincoln MKC crossover SUVs. It's closed this week, and will close again in the week of Oct. 31.
- Kansas City Assembly, in Claycomo, Missouri, builds the Ford F-150 pickup and Ford Transit vans. It will be closed for one week starting next Monday.
- Hermosillo Stamping and Assembly, in Hermosillo, Sonora, Mexico, builds the Ford Fusion and Lincoln MKZ sedans. It's closed this week.
- Cuautitlan Stamping and Assembly, in Cuautitlan Izcalli, Mexico, builds the Ford Fiesta. It's closed this week.
One more Ford plant was closed last week:
- Flat Rock Assembly, in Flat Rock, Michigan, which builds the Mustang.
Are inventories of all of these products too high?
Yes and no. Here are Ford's U.S. inventory figures for these models for Sept. 1 and Oct. 1. Vehicle inventories are typically expressed in terms of "days' supply". For most models, 60 days' worth is considered about right. Inventories for pickups, which come in many different configurations, are generally somewhat higher.
|Model||Days' Supply on Oct. 1||Days' Supply on Sept. 1|
|F-Series (including F-150)||93||95|
As you can see, some are more out of hand than others. A 64-day supply of the Escape is probably no big deal in and of itself. But 96 days' worth of MKCs is far too many, and it's possible that Ford will reshuffle the production mix to make a larger percentage of Escapes after the Louisville plant reopens. Likewise, 72 days' worth of Fusions is a bit high, though it's down from 77 a month earlier. But 115 days' worth of its Lincoln MKZ sibling is far too many.
The most interesting -- and concerning, for investors -- figure is the 93 days' supply of F-Series pickups. On the surface, that's not especially high for the F-Series. But there may be more to the story.
F-Series includes the F-150, which is made at Kansas City Assembly and at another plant in Michigan, and its Super Duty siblings, which are made in Kentucky. The Super Duty is all-new for 2017, the factory changed over just recently, and supplies are believed to be quite tight. It may be that that 93 days' supply includes more F-150s (and fewer Super Duty models) than Ford would like.
It's also possible that Ford is taking note of a recent big boost in incentive spending by pickup rival Fiat Chrysler Automobiles (NYSE:FCAU), and anticipating some lost F-150 sales if it refuses to match its rival's discounts. Likewise, Mustang inventories likely rose because of a big boost in General Motors' incentives on the rival Chevrolet Camaro.
What does this mean for investors?
Through September, overall U.S. sales of light vehicles (the industry term for cars, pickups, and SUVs) are up slightly (0.5%) from last year's record totals. Ford's are also up slightly (0.8%) -- but they've been down year over year in recent months.
What's (probably) happening is that the market is coming off its cyclical peak. That's not really a surprise: CFO Bob Shanks said during Ford's second-quarter earnings call that a slowdown in U.S. retail sales was possible during the second half of 2016.
We should be very clear about this: The pace of sales is still very high by historical standards, and it could stay high as long as the U.S. economy continues to chug along. But without overall market growth, automakers will fight harder for incremental sales gains -- and that means incentives, or discounts, will grow.
While Ford has so far resisted boosting its incentives to extreme levels, we've seen that some other automakers (like FCA with its Ram pickups) have been more willing to spend freely in search of sales gains. That leaves Ford with a choice: It can boost incentives to match its rival's, or it can cut back production.
As a Ford investor, I'd rather see the Blue Oval choose to idle factories for a week here and there rather than boosting incentives to profit-killing levels. But either way, it's a sign that the peak of the U.S. market is probably behind us -- and that means profits are likely to get squeezed going forward. We'll know more when Ford reports its third-quarter earnings next week.