Ford world headquarters. Photo Credit: Ford Motor Company.
Remember the days when Detroit couldn't pay consumers to drive their vehicles off the lot? The days when Ford (F 3.63%) was losing around $2,000 per vehicle sold because of sky-high incentives? Those days when the vehicles were made so poorly their retail values were a joke. Back during those days, Ford and its cross-town rivals General Motors (GM 3.09%) and Chrysler had plenty of inventory -- but those days are gone for Ford. Management has said its 11% sales gains last month likely would have been more impressive with extra inventory for three popular models. That's good news for investors: Ford's ramping up production to meet demand. But will it happen soon enough?
Good problem to have
One of the major "problems" that Ford is facing is not having enough inventory to match consumer demand -- if you can even call that a problem. Consider that the Escape is the first-ever small utility to break 150,000 in unit sales through the first half of 2013. It's annual pace of 300,000 would be the first time any vehicle besides Ford's F-Series has topped that mark in nine years, back when the Explorer was selling during the SUV craze.
To try to meet this increased demand, Ford is looking to increase volumes at its Louisville Assembly Plant, where the Escape is built, and hopes to squeeze out 240 more vehicles per week. It doesn't sound like much, but each one of those coming off the line increases the profitability per vehicle.
The other inventory issue has been with Ford's very popular Fusion, which was selling at a more rapid pace than the Escape until a lack of inventory cut down its sales numbers. Ford is adding a second shift to its Flat Rock plant this summer and will have even more capacity for the popular sedan this fall.
Fortunately for Ford investors worried about losing sales because of inventory shortage, Ford's inventory started August in better shape -- its overall supply increased to 66 days from 61. You can see where Ford's inventory bottomed out below.
Graph by author, inventory information via Automotive News DataCenter.
Also, as Ford derives much of its profits from its best-selling F-Series, it is making sure there will be no inventory shortages with the full-size truck. Ford added more than 2,000 hourly workers at its Kansas City assembly plant to make sure enough production capacity was available. A shortage of F-Series inventory causing lost sales would be way more devastating than shortages with the Escape or Fusion. With all the extra shifts and additional hiring, it's boosted Ford toward 75% of its goal to hire 12,000 hourly jobs in the U.S. by 2015.
Bottom line
This is all good news for investors. As Ford's plants continue to run at high capacity and efficiency, it will drive margins higher, or at least maintain its already strong North America operating margins. The additional capacity coming online as soon as possible will end the last month or two of lost sales due to lack of inventory, boosting market share and sales numbers going forward. As all these developments take place, we can expect Ford to have enough inventory and sales to have a solid third-quarter report. Unless inventory dips back down and prevents maximum sales, expect Ford to remain a solid investment opportunity as U.S. sales continue to surge from pent up demand, housing improvement, and construction demand.
