There's been a rash of news recently lamenting changes in the auto industry -- including Ford's (F -3.30%) move away from sedan production in the U.S. In this week's episode of Industry Focus: Energy and Industrials, host Sarah Priestley talks with Motley Fool senior auto specialist John Rosevear about what's happening in the auto industry and what it means for the future of cars, trucks, pickups, and SUVs.

Find out exactly what changes Ford made to its North American lineup; how Ford is approaching fuel efficiency; why the stock has been selling off so much in the last few months; the biggest concerns for Ford's long-term future; and more. Also, the hosts talk about private company Aston Martin, which is reportedly considering going public.

A full transcript follows the video.

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This video was recorded on May 10, 2018.

Sarah Priestley: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today, we're talking Energy and Industrials. It's Thursday, the 10th of May, and we'll be discussing Ford. I'm your host, Sarah Priestley, and joining me on Skype is Motley Fool contributor and senior auto specialist, John Rosevear. John, how are you doing?

John Rosevear: I'm doing well! How are you, Sarah?

Priestley: I'm good. I was just telling you, I'm very excited that it's almost Friday. We have a food truck festival going on near the office. It's all the good things today.

Rosevear: Oh, good!

Priestley: Recently, we've seen a lot of headlines around Ford. A couple of my favorites: "Ford Is Basically Giving Up on The U.S. Car Business, and GM (GM -1.73%) Is Not Far Behind." Second favorite: "Ford to Kill Fusion, Taurus and Fiesta Cars to Make Way for More SUVs." We've seen a huge amount of attention on Ford's plan to reduce its passenger car lineup and refocus on its larger vehicles, which is all part of this trend toward SUVs, pickups, and crossovers that we've seen in the U.S. and we've actually talked about on this show before. 

According to industry forecasts, in three years' time, 73% of all consumer vehicles in the U.S. are expected to be utility vehicles of some sort. Only 27%, obviously, cars. This is overall. Company specifics are actually much higher, Ford at 90%, GM at 84% SUVs, crossovers and trucks. John, I wanted to get your expert opinion and peek behind the curtain a bit. What's actually going on behind these headlines?

Rosevear: What's really happening is, Ford has this global portfolio of models. Some of them, they make in some regions. Some, they make in many regions. What they're doing is eliminating, essentially, all of their sedan models from the lineup in North America -- Canada, U.S., Mexico. Production of the little Fiesta for North America, it's built in Mexico, that ends next May, 2019. Focus production has already ended, last week, I think, along with the C-Max, which was built on the same production line in Michigan. That factory is not closing. That's where they're going to build the Ranger pickup later this year. Then, the Bronco SUV, the all-new revived Bronco off-road SUV, is coming next year. Then, there's a third smaller off-road SUV in the works, too. It may be called the Maverick, reviving another name from the 70s. That may be built in the same place, it's not clear yet.

The Focus won't completely go away. They're going to import one variant of the all new next-generation Focus from China. It's called the Focus Active. If you imagine a Focus given the Subaru Outback treatment, that's the Focus Active. It's a crossover-y Focus. The midsize sedan Fusion was such a big deal when it was introduced several years ago. It was Ford finally going head-to-head with a product that could rival the Accord and Camry. It was gorgeous, it was well-regarded. It sold like hotcakes. Sales have trailed way off. Ford is giving the Fusion a mild update for 2019, and I mean really mild -- some trim changes and stuff like that. Then it goes away entirely, at least for North America, in, probably, 2021. 

There was an all-new Fusion under development. It will not be launched in North America. It is not clear whether it will be sold overseas. The Fusion is identical in all but name and a few details to another Ford sedan called the Mondeo, which is sold in Europe and China. It's the same car. Not clear what's happening to the Mondeo, either. We'll find out.

The big Ford Taurus, legendary name, sales have been tiny in recent years. That ends sometime fairly soon. Ford hasn't given a date yet. That's built in Chicago Assembly, a factory near Chicago which also builds the Explorer. There's an all-new Explorer coming, and a new Lincoln built on the same architecture as the all-new Explorer called the Aviator. The Aviator launches sometime next year. We believe the Explorer will launch sometime next year, too. The factory is just going to build more Explorers and the new Aviator, and that will fill in any gap left by the end of the Taurus. Ford is saying no one is going to get laid off, nothing like that, they're going to be plenty busy.

The Mustang is Ford's other car, of course. That's not going anywhere. Mustang sales numbers are actually not all that huge, but it's such an important brand-builder for Ford.

Priestley: Yeah, it's iconic.

Rosevear: They only build it in Michigan. They export it all over the world. It's the aspirational car. It's the car that Ford fans want. Everybody has a story about a Mustang. There were these enthusiasts in Europe who waited years and years for Ford to sell it there. Ford finally sells it there. It's been a big deal. That's not going away. There's a next-generation Mustang coming in two or three years. Not clear what else is going on at that factory. 

Also not clear what's happening with Lincoln's two sedans. Back in March, which might have been a thousand years ago in Ford time, I don't know, but it was only about five or six weeks ago, Lincoln's president, Joy Falotico, told me that they aren't getting rid of the sedans anytime soon. In fact, the Continental is practically all-new, and the smaller sedan, the MKZ, was just given a big face lift. But the MKZ is built on the same production lines as the Fusion, so it's not clear what's going to happen there. 

There have been rumors and suggestions and tidbits of news from suppliers suggesting strongly that there's an all-new Continental under development. It may be rear-wheel drive, it may have the famous suicide doors that the early 60s Continentals had, the iconic Lincoln Continentals. That's where the rear door opens backwards. So, if you visualize the side of a four-door, they open up like one big opening, and it makes it easy to get in and out. That may be a rear-wheel drive vehicle. The Continental right now is built at the same factory as the Mustang. The Continental and the all-new Mustang may share architecture. We're not sure yet. But, we don't think the Continental is going away. Not clear about the MKZ after three or four years from now, but it'll be around for at least a while longer.

Priestley: Excellent. So, there's a lot of developments. You mentioned the Ford Fusion. I actually remember the furor around that. It was my company car when I was working in the Midwest, and I loved it, so kind of sad to see that go. But, it's important to put all of this into context, because cars are still a big part of the market outside of North America. I know back home in the U.K., the trend is there, too, but you don't see as many of these big trucks and crossovers, purely because our roads can't really accommodate them.

Rosevear: Exactly. I don't remember whether it's the Fiesta or the Focus that's the best-selling car in the U.K., but it's one of them. Either way, the Fiesta and the Focus are both huge sellers for Ford throughout Europe, particularly in Western Europe. They get optioned up, they sell at good margins. It's kind of a different business than what we see in the United States, even though it's the same basic cars. 

Ford launched an all-new Fiesta in Europe last year. It's getting very good reviews and selling quite well. All-new Focus has been shown. It's coming later this year. These are models that are not, except for that one Focus Active, coming to the United States at all. But they're all-new models. So, Ford continued development of these vehicles and is launching them there. It'll launch the Focus in China, too. I'm not sure if the Fiesta gets launched in China, but it will be launched in some other Asian markets. I know they sell it in Thailand and some other places, as well. We don't know what's happening with the Fusion.

The Taurus, that ship already sailed. There's an all-new Taurus. The current Taurus in the United States was launched in 2009 or 2010. It's actually a very dated model. Ford did an all-new Taurus. It was launched in China in 2016. It looks like a big Fusion. It's mechanically related to the Lincoln Continental. It did well for them for a while. Sales have trailed off a bit. But Ford has never announced plans to launch it here. I don't know what the deal was with that. Maybe the plan to discontinue the Taurus has been in the works for a while. The takeaway is that Ford has not abandoned cars, sedans, globally. But, it's not going to sell them in the United States, at least for the next little while.

Priestley: Yeah. As you said, this isn't the total abandonment that a lot of the headlines have presented. It's more of a case of Ford and GM playing up to their current strength. Jim Farley, Ford's President of Global Markets, called their new lineup authentic off-roaders, and it looks very compelling. The F-series trucks, they sold 73,000 last month, 12th consecutive month of sales gains. The Expedition, which still has that newness factor, the average Expedition spent just 12 days on the lot during April's sales and trading statement. But, I think it's really important for people to know, 75% of the sales for Ford are coming from trucks and vans, and they have this whole commercial aspect that a lot of people tend to overlook. 

So, the move kind of makes sense with all the caveats that go with that, but the market's reaction has been so tepid. The stock is down 11% since the start of the year, and obviously some of that is other factors, too. What's the investor reaction on this?

Rosevear: I think the reaction to this specific issue has been subdued. There's a larger issue going on with Ford. They fired CEO Mark Fields last May and replaced him with Jim Hackett, who came to Ford from outside of the auto industry. He ran Steelcase for years. Very tech-minded, very futurist, very much a deep thinker kind of guy. Ford has been working on this big plan to improve its profitability and improve what Hackett calls its fitness globally. We've seen bits and pieces of it, but Ford has yet to really show us all their cards and show the plan and tell us exactly where they're going. And I think, when you listen to Wall Street analysts on the call, patience is being tested. I think that's a lot of what's going on with this stock right now. Institutional investors are backing away a little bit. Between you, me, and our large audience, I think Ford needs to do something about that. And I've said as much to Ford. [laughs] Yeah, it's an issue. I think this confuses a lot of people, this latest development where they're getting rid of the sedans. To think about this from a shareholder's perspective, Ford has a given number of factories in North America that can build vehicles for North America. Building new factories is really expensive. It's not going to do that anytime soon. SUVs sell with larger profit margins than sedans do, generally speaking. I think what Ford is saying is, "One way to boost our margins in a hurry in a market that's mad for SUVs is to just blast SUVs out of all of our North American factories." I think, if you look at it with that simplicity, the plan starts to make sense.

Priestley: It does. And I think, like you said, Jim Hackett is essentially betting that the profits gained from this rise in the average selling price and the average transaction price is going to accommodate for the sales for the sedans. And, they're heavily incentivizing a lot of the sales of these sedans, because it's such a commoditized market, and Jim Farley said this, he said it just won't be traditional silhouetted sedans that tend to be commoditized that they're going to develop, and that makes such sense, because it's really become such a hotbed of competition.

Rosevear: Right. And Ford is also suffering here from, the Focus, Fusion and Fiesta are all dated models. Like I said, they've already introduced the all-new ones, all-new Fiesta overseas and the all-new Focus is being rolled out shortly. There would probably have been in the plan an all-new Fusion the next year or the year after, certainly, we'd be hearing about it by now. 

And, they're competing against the Camry and Accord, which were heavily redone, all-new, for 2017, both of them, I think. Ford was a step ahead when the Fusion was first launched several years ago, now it's kind of a step behind, so it has to ramp up incentives, especially in that category, midsize sedans, where sales are so huge, and a lot of those cars get sold on price, monthly payment.

Priestley: Yeah, absolutely. So, how were the sales across the board for the auto makers in April?

Rosevear: Ford's U.S. sales were down, I think, 4.7%. Pickups are still doing well. The sedans are down. SUVs are more or less a wash. The thing about Ford's SUVs right now is, they're just in a tricky spot in their product cycle. The Explorer and Escape are their mainstay SUVs, those are the names everybody knows. They're still doing well. They're still selling in strong numbers, but they're both dated models. All-new ones are coming next year. It's that thing where all-new models tend to command the highest prices, get the biggest margins, get the most sales interest, and then interest kind of tails off over a model's life cycle. Those two are just near the end of their life cycle. So, they're not seeing the sales growth in SUVs that some other companies who have newer products competing against -- Toyota has a new RAV4, for instance, that's doing well, whereas the Escape has slipped back a bit. But that's just ordinary course of business in autos. 

Toyota's sales were also down about the same amount, just under 5%. The Camry has been the exception to the "everybody's walking away from sedans" rule recently. It has sold surprisingly well. Toyota has been aggressive on price and it's a very good product. It was all-new last year. But, Camry sales are starting to slip, they're down almost 10% from a year ago in April.

Honda was down 9.2% overall. Again, they have an all-new Accord, but it's really lost ground to the Camry. I think it's because Toyota has been more aggressive on pricing. Honda has tried to move the Accord upmarket a little bit to improve margins, and that hasn't drawn the number of buyers that perhaps they'd hoped.

Nissan took a big hit. Nissan's sales boomed for a while because they were very aggressive with pricing and incentives, offering the best deal out the door. That gave them big sales gains but crunched their margins. They weren't getting anything like the operating margins in North America that we're seeing from Ford or even from Honda. They're trying to cut back on all of that and to get better pricing. They're also selling a lot of cars to rental car fleets, which is a business that Ford and GM have pulled away from, so there was an opportunity, but those are low profit margin sales. They sell cars in bulk in batches. It's trying to roll back all of that. Its U.S. sales were down 28% less month, and it's really adjusting and resetting here. 

Fiat Chrysler did great. Fiat Chrysler already gave up its mainstream car models over the last couple of years. They're selling Jeeps, Jeeps, Jeeps and more Jeeps. Also, somewhat surprisingly, the Dodge Caravan minivan had a great month in April. Sales were up quite a bit. 

The last big name on our list is GM. They have given up reporting monthly sales, they've gone to quarterly reporting. Of course, Bloomberg talked to people inside GM and the dealers and got the story that their sales were down probably 2.5-3% in April. With GM, the story is similar to Ford. GM's big pickups, the Chevy Silverado and GMC Sierra, all-new ones are coming at the end of the year, so they're selling down, basically, the last of the old ones -- they're still making them, but only for a little while longer -- at big discounts, moving them out. The tooling is all paid off. They can afford to take discounts on them and sell them aggressively on price. 

Where GM's story is shining is on crossover SUVs. Over the last few years, they launched a complete new line of crossover SUVs across all four of their U.S. brands -- Buick, Cadillac, Chevrolet and GMC. There are nine or 10 new models. They're all doing well. The Chevy Equinox in particular has been racking up huge sales. These are products that are very much up-to-date, very competitive, and designed around profitability, which is one of CEO Mary Barra's things. These are more profitable than the products they replaced, both because they have more appealing options that encourage people to buy more expensive versions, and also just because of various manufacturing innovations. This has been a big story for GM. It's driven them to some very good margins, and they expect that to continue even as they go through the expensive transition to the all-new trucks. They expect the Crossovers to keep their margins fairly strong. So far, so good.

Priestley: Yeah, that would be impressive. I think a lot of the market fear around the moves that they're making is the worry that they're making the same mistakes they've previously made when they emphasized the high-profit truck businesses and slowed investment in fuel-efficient vehicles, and then getting caught out when gas prices rose. Jim Farley addressed this. He said, "It's our plan that these new vehicles will give our customers utility benefits without the penalty of fuel economy. In fact, they get great fuel economy." Do you think the innovation is really there? We're seeing fuel prices begin to creep up again. It's a valid concern. Do you think they're addressing it?

Rosevear: There are a few things here, if you grab Ford people and talk to them on background or whatever, that they'll tell you that they're thinking. First and foremost, all of Ford's SUVs, and pickups, even, are considerably more fuel efficient than they were a decade ago. Second of all, we talk a lot about crossovers, which is an SUV-shaped vehicle built on a structure more like a sedan's. These are different from the big truck-based SUVs that were popular 15 years ago that were based on pickup truck chassis. They're lighter in weight, they drive more like cars, and they're more fuel efficient. A modern Ford Explorer gets considerably better fuel economy than a 2005 Ford Explorer, for instance.

Ford is also saying, "We have a small crossover, the new EcoSport." Ford is also investing in, there are going to be a whole bunch of new hybrids. For instance, the next-generation Explorer will be available as a hybrid. There's never been an Explorer hybrid before. They're going to do a hybrid F-150 for, I think, 2020. This is all in the works. So, there's that, too. If there's a concern, well, they have hybrids. And, they have pure electric cars coming, too.

The last thing, of course, is that if they really have to all of the sudden sell Focuses and Fiestas here, they can import them while they get factories set up. [laughs] They're building them in huge numbers. The Focus will be built in huge numbers in China. Fiesta, I believe, in Thailand as well as Europe, and of course the European factories as well. They could arrange to have some here in a matter of, not years, I mean, it would take several months to get everything set up, get the supply chain set up and get them distributed and so forth, but we're not talking years. They could respond, in auto industry terms, fairly quickly. If they really needed to have small cars in the U.S. again, it could be done. It's not like development has stopped on the Focus and Fiesta, because they're so important in Europe and, to a lesser extent, in China.

Priestley: Yeah. One near-term headwind that I wanted to ask you about because it's been a big news topic recently, the F-150 plant in Michigan that's facing, potentially, weeks of downtime after the fire damaged the premises of a parts supplier, Meridian Lightweight Technology. It looks like it might actually also cause issues for the Missouri production plan. 

We've talked a lot about how these high-end trucks are demanding a higher value and getting more margin for the company. If these plants idle for too long, it's between 10,000-15,000 F-150s a week that's out of the supply chain. Apparently, there's around a quarter of a million F-150s in the dealer network. I mean, I don't think investors should be too worried about this, but what's your take?

Rosevear: Well, we have to look, as investors, at the sales and shipments. Ford books revenue when a vehicle is shipped to a dealer. But, then, the dealer, which is an independent business -- these are franchises -- then sells it on, then Ford counts the sales after the dealer sells the car or truck to a customer. The dealers have plenty of inventory of F-150s. All of the Detroit automakers keep big inventories of their full-size pickups because they sell in huge numbers and because they're available in so many different combinations -- two-wheel drive, four-wheel drive, crew cab, club cab, short bed, long bed, heavy duty, extra heavy duty -- more so than with cars. So, inventories of trucks have always been higher. That's seen as the right way to do business with trucks, to keep around a 90-day supply, whereas you want to aim at more of a 60-70 supply with a sedan or a crossover. So, there are plenty out in dealer lots. 

Ford held a press conference last night. One of the things they said was, "We are going to lose some production, but we will be able to make that up in the long run, and we don't think customers coming to dealers are really going to notice. We think that just about everybody who wants a new Ford truck is going to be able to find the one they want because we have plenty in inventory for the time being. We'll make up the lost production as necessary once we have this part supply issue worked out, which, we don't have an ETA on that yet, but we think it's sooner rather than later." It was quite a fire at the factory. I've seen photos of it. The factory took significant damage. 

Apparently, Ford was able to get some of the tooling for its specific parts out of this factory. The question is whether that can be set up somewhere else, or whether they need to wait for repairs to this particular factory or what. But, Ford is moving aggressively to restore supply of these parts. They will lose some production. That will probably be visible in their second quarter results. Although, 15,000 F-150s is not a ton. But, if they lose 60,000, you're going to see that in the second quarter North American results, because they won't have the revenue from those trucks, because they won't have shipped them. Will they make that up in the third quarter? Yeah, absolutely. The workers at those factories will collect some overtime pay working weekends. [laughs] 

Priestley: Yeah, they might need it.

Rosevear: That's how it works. And that's good money. One the other hand, you don't want to lose weekends in the summer. But, it'll happen. They won't have trouble with it. It's just, you may see, effectively, some revenue in North America get shifted from the second quarter to the third quarter, and we may have to have to rework our expectations for how the year unfolds. Long-term, I don't think there's a big issue here. I don't think you're going to be driving droves of customers away because they can't find any F-150s.

Priestley: Yeah, people tend to be pretty loyal to their truck brands. I think, this is a nightmare for any manufacturer, especially if you've got a single-source supply, to hear about something like this. But, no, they seem to be dealing with it appropriately. Thank you so much for shedding all the light on this Ford issue. I have one last little question for you, because I know that we're both Aston Martin fans. They turned their first profit since 2010, and they're considering going public. I just wanted to get your opinion on the rumored news.

Rosevear: Well, nobody gets into a job like I've got without being a car enthusiast. Aston is my great love. I had an Aston for a while, an old 1977 V8 Vantage. I will have another one after my kids are out of college, I hope. [laughs] You know? I watch the company closely. 

I'm a big fan of the current CEO, Andy Palmer, who came from Nissan and has really put the company on course to profitability. They had a good year in 2017, driven by good results for a new model. They have another new model this year, an all-new V8 Vantage, it's just now rolling out. Reviews have been very strong, and with Aston that means it'll sell. 

I did a quick analysis. They've always been a private company, so we've never really had earnings reports to look at, but they released some limited 2017 numbers a couple of months ago. Back in February, I did a comparison of what Aston told us about its performance in 2017 with Ferrari (RACE -2.37%), which, the stock has taken off since its IPO a few years ago, powered by the fact that Ferrari has huge profit margins. Their operating margin in the first quarter was, like, 25%, which is ... Ford would love to get to 10%.

Priestley: [laughs] Yeah.

Rosevear: Seriously! They're a luxury company that happens to sell cars, and that's the way to think of them. Aston's profitability is not quite at Ferrari's levels. It's probably well ahead of Ford's. They sold about 5,000 vehicles last year, whereas Ferrari did about 8,400. And yes, these numbers are tiny, but this is Aston Martin and Ferrari. [laughs] You know? These are little companies, compared to 70,000 F-150s a month and that kind of thing. 

What I think Aston would tell you is, they're in a stable place, they have new models rolling out, they have a partnership with Daimler, which is supplying them with engines. Aston used to be owned by Ford. They used to get their engines from a big Ford factory in Germany. That relationship is winding down, and they're getting a new generation, up-to-date, high-technology engines and some other parts from Daimler, from Mercedes-Benz, effectively, an engine design that's being built specifically for Aston. So, that's a good relationship. 

Daimler owns a small stake in Aston. They have new technology. They have an electric vehicle on the way. They're pulling this together. They have a brand-new factory in Wales. They're going to roll out an SUV, a luxury SUV, which I think is something Aston could get away with. And, they're relaunching an old brand. Years and years and years ago, Aston Martin bought a maker of luxury sedans called Lagonda. And there have been Lagonda sedans on and off over the years. Tiny volumes, typically. In fact, the proper name of Aston is Aston Martin Lagonda Ltd. But, they're relaunching Lagonda, starting in about four years, as an electric-only super luxury brand. Basically, if you've had the Tesla and you want to move upscale, that's where they want to be. [laughs] They want to be there waiting for you.

Priestley: More luxury than Tesla.

Rosevear: Yeah. When your $150,000 Tesla just isn't doing it for you anymore, you can spend $400,000 on a Lagonda. That's the vision. Anyway, all of this adds up to, Aston has room to grow, both in terms of margins and in terms of overall sales. 

The trick with any luxury company is, how far do you grow sales before the brand gets dented? Ferrari capped its sales at 8,000 a year for a long time. They think now they can ease it up to 10,000. So far, so good. Their pricing has continued to be very strong. Aston may never quite get to Ferrari's level of super-coveted-ness, but if it can get into the ballpark, there will be some upside to this, if they go public, subject to the cycles at the global economy, of course.

Priestley: Of course.

Rosevear: Luxury products behave in very interesting ways during economic downturns. Sometimes they're dented, and sometimes they're not as dented as you'd think, and sometimes sales just fall off a cliff. [laughs] It sort of depends. 

I think there's some really intriguing upside for Aston if it decides to go public. They have a couple of big investors who are looking to exit, now that Aston is stable and profitable. These are private equity companies that want to go on to the next turnaround, basically. There's no rush, but whether they exit via an IPO, or, because it's possible, somebody could acquire Aston, it's possible Daimler could acquire Aston. This is just hypothetical, I don't see any explicit signs that something like that is in the works. But, there are number of possibilities for the way that'd happen. IPO is one of them. If it goes public, I will definitely be taking a closer look at it as an investment, and not just because I like Astons. [laughs] 

Priestley: [laughs] We'll definitely get you back on the show if that becomes a reality. Thank you so much for joining me today and imparting all your wisdom!

Rosevear: Thank you for having me!

Priestley: No, thank you! That's it from us today. If you would like to get in touch, please feel free to email us at [email protected], or tweet us on Twitter @MFIndustryFocus. Thank you to Austin Morgan for producing the show. As always, people on the program may own companies discussed, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. For John, I'm Sarah Priestley. Thanks for listening and Fool on!