Ford (NYSE:F) continues to knock the ball out of the park with its second-generation Ford Fusion. The new Fusion, which debuted to great fanfare last fall, has quickly become one of Ford's best-selling models. I have been bullish on the new Fusion's potential since last August, and the early sales results have still outperformed my expectations.
However, sales gains may have peaked for the time being, due to capacity constraints, which were highlighted Tuesday morning by Ford's management on the company's sales conference call. Fusion inventories are already very tight in many parts of the country, and are likely to get even slimmer during the spring and summer car-buying season.
From an investor standpoint, excess demand is a high-class problem to have. Lean inventories will allow Ford to sell as many Fusions as it can make without resorting to discounts. Furthermore, dealers may be able to cross-sell other Ford models to customers who come into dealerships thinking about purchasing a Fusion. Lastly, Ford will bring a second factory online to produce the Fusion beginning this summer, which will provide a foundation for further sales gains.
Last month, I pointed out that Ford was gaining on competitors in the large and growing midsize car segment in 2013. The U.S. midsize segment has been dominated by the big three Japanese automakers -- Toyota Motor (NYSE:TM), Honda Motor (NYSE:HMC), and Nissan -- for many years. However, the Fusion outsold the Nissan Altima in both January and February, catapulting Ford into third place.
In March, Fusion sales rose once again, setting an all-time monthly record with 30,284 sales. If not for the capacity constraints mentioned above, Ford could have sold more vehicles. Supply was very tight in big markets like California and south Florida, where Fusions sat on dealer lots for an average of about 15 days (the industry norm is approximately 60 days). Fusion production at Ford's Flat Rock plant is expected to begin around July, so Ford should be able to meet full demand by sometime this fall. Until then, supply is likely to be tight, which means there won't be many discounts, and selection will be limited for car buyers.
While the Fusion's popularity is great news for Ford shareholders, there are still reasons to be cautious about the stock. Despite Fusion's strong showing, Ford fell back into fourth place in the midsize segment in March, as Nissan Altima sales rebounded to 37763 units. (In fact, Nissan jumped all the way to first in the midsize segment last month, edging out longtime segment leader Toyota Camry by 100 units.) Nissan's gains were probably due to higher incentive spending; according to TrueCar, Nissan's incentives averaged 9.9% of the average transaction price last month, up sequentially from 9.6% in February. By contrast, incentive spending fell sequentially from 8.8% of ATPs in February to 8.6% of ATPs at Ford last month.
It is encouraging that Ford was able to grow Fusion sales even while pulling back on incentive spending last month. However, the yen's recent drop has given Japanese automakers more room to offer incentives to drive sales volumes. Of the big three Japanese automakers, only Nissan has gone that route so far. However, I don't think Toyota will appreciate having Nissan cut into its own sales: Total Toyota division car sales were down more than 5% last month over March 2012, with the midsize Camry down more than 10%. If a price war develops between the Japanese automakers, Ford could be caught in the middle and forced to offer margin-sapping incentives (or risk losing market share).
Ford had a great month in March, and a great first quarter in the U.S. In all three months, the Ford Fusion was a standout. The Fusion is likely to be in very short supply for the next six months or so, but I expect it to start gaining share again later this year. However, investors should keep an eye on incentive spending at Ford's competitors as the year progresses. If Japanese automakers take advantage of the weak yen to start a price war, Ford's gains could be tempered.