Ford's (NYSE: F) sales have been just so-so at home but, under the radar, the company has a great global sales story brewing.
Through the first six months of the year, Ford's compact Focus was the world's best-selling car, out-selling the longtime leader, Toyota's (NYSE: TM) ubiquitous Corolla.
Its success is well-deserved. Like most other recent Fords, the Focus is an excellent car, and its global success is a strong testimonial to the strength of Ford's product-driven renaissance.
So why isn't the Blue Oval's great lineup selling better at home?
Ford seems to be losing ground to rivals…
Through July, Ford's year-to-date U.S. sales were up just 5.1% over the year-ago period. That's not bad, but it's well behind the 14% gain posted by the industry as a whole, and far behind the gains posted by key overseas competitors doing business here.
The outsized gains from Toyota and Honda (NYSE: HMC) haven't been a surprise, of course, as both saw their output clobbered in the wake of the March 2011 tsunami in northern Japan. But what about the 14.7% gains for Nissan, the 9.5% gains for Hyundai, the 34% gains for Volkswagen (OTC: VLKAY)?
This is a trend that looks set to continue. Analysts at TrueCar.com are forecasting a 9.5% year-over-year increase in U.S. sales for Ford in August -- nice, but far shy of the 17.2% gain they see for the industry as a whole. That's roughly in line with other estimates: Wall Street analysts polled by Bloomberg are forecasting an average 18% gain for the industry, but just about 8.5% for the Blue Oval.
What's going on? It's not the cars. Unlike rival General Motors (NYSE: GM), which is in the midst of a massive product-line overhaul, Ford's current line of vehicles regularly rank at, or near, the top of most comparison tests. Aside from some complaints about the company's touch-screen control system, most reviewers – and plenty of car shoppers – have only good things to say about Ford's latest offerings. The success of the Focus around the world isn't a fluke.
So what's the deal?
…but here's why that's not necessarily a bad thing
The deal is that Ford isn't offering too many deals these days. Ford's spending on retail "incentives" -- those cash-back or cheap-financing deals, which are so often advertised on TV, have dropped sharply in recent months. And, unlike GM, Toyota, Honda, and other rivals, Ford has stayed away from "stair-step" programs that pay bonuses to dealers who hit aggressive sales milestones.
Those decisions have no doubt cost Ford some big sales gains, but this is a well-thought-out strategy. The "One Ford" plan that CEO Alan Mulally has used to revitalize the Blue Oval has a lot of parts, but one key principle is that Ford matches production to real demand, as Mulally often says. "Real demand," in Ford's view, is demand without the big incentives and heavy dealer bonuses that erode profit margins.
Put another way, Ford's whole production and distribution system is set up and managed to make just as many cars and trucks as the company can sell profitably. While sales growth is always good, too much can actually become a problem of sorts: Earlier this year, Mulally said that North American production of several key models, including the Focus, was nearly maxed out.
That sounds like a good thing, but once a factory is maxed out, making more cars isn't simple. Big increases in production would involve investing in new factories or assembly lines. Those would be costly outlays for Ford, one that would require buy-ins from suppliers who are still wary after their own near-death experiences in 2009 – and one that would require a lot of confidence in the still-recovering U.S. economy.
The upshot: Watch profits, not sales
In the bad old days, market share was a huge priority and concern for the Detroit automakers. At least at Ford, that's not true anymore. While share is important, and watched carefully, the bottom line -- profit -- is what really matters.
Ford's profits in its home market have been strong. Despite concerns overseas that hit Ford's overall bottom line, its North American division returned strong profits again last quarter, with a fine pre-tax operating margin of over 10%.
Ford will incrementally expand its production as new models are introduced, and as economic conditions warrant. But as long as the company's plants are running at or near capacity, and as long as profits and margins continue to be strong, Ford executives are unlikely to lose too much sleep over sales gains that trail those of bigger spending rivals.
Ford's stock has been under pressure lately, dropping to levels not seen in years. But the company is still performing very well at home, and is investing heavily for growth abroad. Have these short-term pressures created an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Click here to get instant access to this premium report.
