1 Huge Risk for Owning Ford Motor Company's Stock This Year

Ford Motor Company is planning on being less profitable this year amid many vehicle launches, but here's one big risk management faces.

Daniel Miller
Daniel Miller
Jul 22, 2014 at 2:33PM

Trust is vital for any kind of relationship to be successful, and that's never truer than in the investing world. You're putting your hard-earned cash into a company's stock and trusting that management isn't going to screw things up -- kind of scary, no?

With a history of mismanagement, it's a wonder anyone is willing to trust -- or invest -- in Detroit automakers such as Ford Motor Company (NYSE:F). Fortunately, former CEO Alan Mulally worked miracles over the last five years so investors would be willing to trust his management team's guidance. But as newly appointed CEO Mark Fields takes over, there is one major risk facing Ford that investors are trusting management to keep under control.

Go big or go home
If Ford was presented with those options regarding its vehicle launch schedule this year, the company certainly opted to "go big" -- really big. Ford's launching the most new or significantly refreshed vehicles this year than in any other year in its long history, including 16 in the United States alone. However, with the promise of a fresh vehicle lineup and surging sales also comes huge risk.

When speaking at Automotive News' World Congress, Mulally said Ford's biggest challenge would be "going up in production and delivering all the launches." 

The risk that investors and Ford face can essentially be broken down into three potential problems.

First, consider recent redesign launches of the Fusion and Escape. The Fusion and Escape launches were marred with recalls; in fact, the Escape has been recalled 10 separate times. Now, recalls are a part of the automotive industry, and for the most part, these recalls were small problems that didn't adversely affect sales. However, these two recent launches highlight the problem that large industrial manufacturers face when launching a new product: Problems will happen, glitches will happen, suppliers could fail, and issues not thought of will arise. As more and more of Ford's vehicles are consolidated on platforms and share some parts, the potential for larger recalls is amplified.

After newly launched vehicles were recalled to fix small issues, Ford took steps to fix its process and upgrade its vehicle quality inspection. That leads us to the second potential risk.

Because Ford wanted to avoid recalls that could have negatively affected Lincoln's MKZ sedan launch -- a vehicle that was supposed to mark the beginning of Lincoln's turnaround story -- it had a large bottleneck of vehicles sitting at factories waiting to be inspected for quality issues. Because of that, supply of the MKZ was months late to dealerships.

It was a huge debacle. Ford wasted millions of dollars on Super Bowl ads in January 2013 to spur demand for the MKZ, and sales plunged because there wasn't enough inventory to hold dealers over until the new model arrived.

Chart by author. Information source: Ford Motor Company's sales releases.

As you can see above, sales of the MKZ all but stopped during the quality inspection bottleneck. Now, imagine if that happens to Ford's most important and profitable product, the F-Series, during this year's launch of the 2015 model. That would severely hurt Ford's top- and bottom-line performance during the short term. 

The scary thing about this bottleneck risk is that Ford is using aluminum in its 2015 F-Series truck body, which hasn't been done before in the automotive industry, at least not on volume anywhere near this magnitude. As this aluminum-bodied truck is breaking new ground for Ford, there is a possibility of supplier mishaps in addition to Ford's own potential problems.

Juggling act
Assuming that all of these launches go smoothly, in terms of no recalls or production bottlenecks, it's still a very difficult juggling act for Ford's management team. In addition to Ford's annual planned factory shutdown during the summer, the company must anticipate assembly line adjustments for the new models and build up vehicle inventory beforehand so a continued supply of vehicles will reach dealerships. See the uptick in Ford's inventory, recently, below.

Chart by author. Information source: Automotive News DataCenter.

If Ford overestimates the inventory it will need during production downtime, it will leave too many old models on dealership lots, which will require hefty and costly incentives to sell. As that scenario plays out, it would cannibalize sales of Ford's newer model and in turn make the entire ordeal far less profitable for the automaker.

Bottom line
While on the road passing by dealerships, this process is almost unnoticeable. One day there's a sale for 2014 models, and one day the shiny brand-new 2015 F-150 appears; it seems to happen at the snap of a finger. Currently, investors are trusting that Ford hasn't bit off more than it can chew with its most ambitious vehicle launch schedule in history.

"I can tell you sitting here in early May that everything is on plan," Joe Hinrichs, Ford president of the Americas, told Automotive News, adding that, "that curve gets a lot steeper as the months go by." 

So far, so good, but investors should listen closely to Ford's second-quarter conference call this week for any additional insight, because this year's slew of launches will be critical to Ford's success in the back half of 2014 and beyond.