Truck enthusiasts have been eagerly anticipating Ford Motor's (NYSE:F) upcoming 2015 Ford F-150 launch, which is expected this fall. The 2015 Ford F-150 will have an aluminum body, which will cut up to 700 pounds of weight, thereby leading to big fuel efficiency gains.
The downside of a big new model launch is that the changeover can cause some dislocation. On one hand, there is a risk that demand will drop off as customers wait for the new model. On the other hand, there is a risk of running low on inventory as plants change over to produce the new model. This latter issue is already starting to affect the 2015 Ford F-150 transition.
Big transition coming
Ford has been preparing investors for a bumpy transition since late last year. The company's 2014 outlook (provided last December) projected lower wholesale volume in 2014 in North America compared with 2013.
The F-Series changeover is one of the major culprits. Last year, Ford sold an astounding 763,402 F-Series trucks in the U.S. -- most of which were the F-150. That represented a little more than 30% of Ford's total U.S. sales volume.
However, Ford revealed last month that preparations for the switchover to the 2015 Ford F-150 will result in the loss of 90,000 pickups' worth of production. As my Foolish colleague John Rosevear explained, Ford needs to do extensive retooling to handle what will be the first high-volume aluminum-bodied vehicle.
That will cost 13 weeks of downtime this year between Ford's two truck plants. The first three weeks of downtime occurred early in the year, there will be another 3 weeks of downtime this month, and the remaining downtime will occur later in the year. There will also be downtime at the Kansas City plant in early 2015 as Ford completes the changeover to the 2015 Ford F-150.
A hit to sales
Last year, Ford's truck plants were running flat out to keep up with demand, so the loss of 90,000 units worth of production will definitely hurt. To prevent a severe shortage later this year, Ford has been cutting back on incentives recently. In June, Ford had the lowest incentives and highest average transaction prices in the pickup segment -- despite having the oldest product.
With lower incentives, price-sensitive buyers are moving away from Ford, which is the goal. Through the end of April, F-Series sales were up 3.9% year-over-year. However, F-Series sales fell 4.3% in May and 11% in June, compared with very strong sales figures a year ago. That left sales down 0.5% year over year for the first half of 2014.
Margins will take a hit -- but maybe not in Q2
The launch of the 2015 Ford F-150 will hurt Ford's 2014 profit margin, and not just because of the cost of retooling its truck plants. F-Series trucks are the most profitable vehicles Ford sells, and losing 90,000 units of pickup production will cause an unfavorable mix shift this year.
It's certainly helpful that Ford is seeing a strong pricing environment for its current F-Series trucks. Overall pickup demand remains solid, and there's no sign that buyers are holding off on buying a truck until the 2015 Ford F-150 hits dealer lots this fall.
However, while Ford is slightly boosting the profit margin for each pickup truck it sells, this factor is vastly outweighed by the mix shift from trucks to less profitable models. F-Series trucks have much higher profit margins than the rest of Ford's lineup. This means that as F-Series trucks become a smaller part of the mix, Ford's overall margin is bound to fall.
This margin hit probably won't show up in Q2. Automakers' earnings are based on wholesales, not retail sales. Winter storms crimped Ford's production in Q1, which hurt its Q1 North America profit margin. By contrast, Ford may have caught up on some delayed wholesales in Q2. Additionally, no F-Series downtime was scheduled for Q2. Most of the downtime is scheduled for the second half of the year, which will be a severe headwind in Q3 and especially Q4.
Ford investors shouldn't worry too much about the profit gyrations that are likely to occur this year as Ford prepares to launch the all-new 2015 Ford F-150. The significant changes coming in Ford's new pickups left the company with no alternative to significant downtime that will cut into earnings in the short term. Ford also has a slew of other new vehicles this year, which will bring associated launch costs.
All of Ford's investments this year should pay off next year and beyond in the form of record earnings, as new technology and fresh styling drive high demand for Ford vehicles. In a few years, the choppy F-Series sales trends of 2014 will seem like the distant past.
Adam Levine-Weinberg is short December 2014 $15 puts on Ford. The Motley Fool recommends and owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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