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Solid August Sales Validate Ford's SUV Strategy

By Adam Levine-Weinberg - Sep 5, 2018 at 8:35AM

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Cars are steadily becoming a smaller part of Ford's delivery mix, while demand for crossovers, SUVs, and trucks continues to rise.

Shares of Ford Motor ( F 2.03% ) have tumbled to a multiyear low in 2018, as profitability has been eroding in virtually every region of the world -- including the critical North America market. As a result, Moody's recently downgraded Ford's credit rating, and a growing number of analysts and investors are worried that the company will have to cut its dividend.

Ford's recovery strategy relies on a combination of enacting deep cost cuts, exiting underperforming businesses, and updating the automaker's product portfolio. In the domestic market, that will entail a decisive shift away from traditional cars in favor of crossovers, SUVs, and trucks. Ford's strong sales results in those market segments during August should give investors more confidence that this product strategy will succeed.

A surprise sales increase

Ford's U.S. deliveries rose 4.1% year over year last month, beating expectations for a modest decline. Retail sales crept up 1.1%, while fleet sales jumped 15%, driven primarily by demand from commercial and government customers (rather than less-profitable sales to rental car companies).

Furthermore, Ford boosted its sales last month despite continuing to push average transaction prices (ATPs) higher. Ford reported that ATPs rose $1,400 year over year in August, which was more than double the industry average for ATP increases.

A black Ford F-150

Strong pickup demand is driving Ford's ATPs steadily higher. Image source: Ford Motor Company.

Who needs car sales anymore?

Importantly, Ford posted a solid sales increase last month even though sales of its traditional car models plunged again. The automaker's two most popular car models, Fusion and Focus, posted year-over-year sales declines of 35% and 30%, respectively.

However, Ford more than offset the decline in car sales with a 20% surge in sales of crossovers and SUVs. The EcoSport subcompact, which made its debut in the U.S. in January, continues to outsell the equivalent car model, the Ford Fiesta. Moreover, sales are surging for the automaker's largest and most profitable crossovers and SUVs. Ford Explorer deliveries jumped 19.2%, while deliveries of the Ford Expedition and Lincoln Navigator both roughly doubled year over year.

Ford's industry-leading truck franchise also maintained its steady growth rate. Monthly F-Series deliveries surpassed 80,000 units for the third time this year, rising 6.3%. Meanwhile, van deliveries ticked up 4.2%.

Excluding the Mustang pony car, which remains part of Ford's long-term plans in the U.S., cars represented just 13.2% of the Blue Oval's delivery mix last month. Including the upscale Lincoln brand, cars accounted for 13.7% of the company's domestic deliveries.

Ford can offset the sales loss from discontinued nameplates

As Ford phases out production of its car models (other than the Mustang) over the next couple of years, it will have to significantly increase its crossover, SUV, and truck sales to keep its total volume flat. If fuel prices continue to rise, doing so could be challenging. But with cars down to 13%-14% of the delivery mix in August, the goal of fully replacing Ford's car sales volume is certainly within reach.

Ford will launch updated or all-new versions of its high-volume Escape, Edge, and Explorer nameplates between now and the end of 2019. It will also replace the Lincoln MKX with the new Nautilus model this fall. Updating these aging models should help boost sales.

Ford will also reintroduce the Ranger midsize pickup in the U.S. market in early 2019, followed by a relaunch of the Bronco off-road SUV in late 2019 or early 2020. The Lincoln brand will also get a new model next year: the Aviator full-size crossover. Ford has hinted that other new models -- including electric vehicles -- are planned for the next few years.

While Ford's overall sales performance has been shaky recently, its rising crossover, SUV, and truck sales volumes bode well for the future. The strong reception of its most recently updated models is particularly encouraging. (Sales and ATPs are surging for both the Expedition and the Navigator.) In short, Ford's August performance should give investors just a little more confidence that the company's strategic pivot to larger, more-profitable vehicles will pay off.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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