Ford Motor Company (NYSE:F) recently posted some positive news from its European region. More specifically, Detroit's second-largest automaker posted a profit in Europe, albeit largely thanks to a change in pension accounting, and also increased sales in its traditional 20 Euro markets by 10% in January, compared to the prior year -- a 20 basis point gain of market share.
However, with Europe's new vehicle sales forecast to grow in the low single digits moving forward, how will Ford continue to improve its profitability? Here are four factors for investors to watch, hopefully all factors combine to grow Ford's profits at a faster clip than the industry sales.
Most of us know SUVs are surging in the U.S. market: with light-duty trucks representing 58% of sales during January. Also, the cross-over segment was the largest selling segment by a landslide. More than 310,000 crossovers sold in the U.S. last month compared to the next closest segment, midsize sedans, which sold less than 230,000 units. However, SUVs aren't only surging in the U.S., the vehicles are seeing sales increases overseas in China and Europe as well.
Ford plans to take advantage of this trend and roll out more SUVs in Europe which should increase average transaction prices and margins in a region typically dominated by less profitable passenger cars. Ford is rolling out the new Edge large SUV in Europe during the first half of 2016 and it expects to grow its total SUV sales by 30% this year. 2016 should be the first year ever that Ford breaks 200,000 SUVs sold in Europe.
No Lincoln, but ...
There's not much of a business case to be made in Europe for Ford's struggling Lincoln lineup. It just isn't plausible for a struggling lineup with little luxury credibility to take on Europe's star luxury brands on their home turf. Rather than introduce Lincoln to Europe, Ford decided to create a super-premium Vignale brand for its Ford vehicles. The strategy is to rope in a more valuable and profitable consumer, but not compete head on with either Ford's mainstream vehicles or European luxury brands -- it has to find the sweet spot in-between.
Right now Ford is offering an upscale Vignale version of its Mondeo, known to us as the Fusion. However, Ford plans to expand the lineup with a Vignale S-Max minivan coming soon and at least five new Vignale models by the end of 2017. As a rule of thumb, luxury brands only generate about 10% of sales but generate roughly one-third of industry profits. If Vignale catches on in Europe, and can produce similar financial results, it'll certainly help Ford increase its profits in the region.
Sure, SUVs and Vignale models will help Ford improve its transaction prices and margins, but behind the front lines is a potential to improve its strategy and efficiency. Ford has continued to focus on selling vehicles into higher value channels. Last month retail and fleet sales generated 81% of Ford's car sales in Europe which was 300 basis points better than Ford's result the prior year and it was 1,100 basis points better than the industry average. That's been a common trend for Ford, and focusing on more profitable channels will help with residual values and total margins in the region.
Another factor Ford plans to focus on is cost cutting. Detroit's second-largest automaker is looking to cut hundreds of "white collar" jobs in Europe and hopes to find annual administrative savings of about $200 million. That would be a huge, huge boost to Ford's bottom line in the region considering the automaker posted a $259 million full-year 2015 profit in the region.
Ford has slowly but surely made a lot of progress selling its large commercial vehicles -- think of large van-like vehicles that small businesses use. Last year Ford's brand became Europe's No. 1 commercial vehicle brand, and it was the automaker's best year for commercial vehicle sales in Europe's traditional 20 markets since 2007. Ford plans to grow even more this year by offering its top-selling Transit and Transit Custom with a new powertrain and additional technology.
Ultimately, as Ford continues to focus on selling more vehicles in higher value channels, adding to its profitable lineup of SUVs, and cutting costs, the automaker should be able to grow its pre-tax profits in Europe at a fast clip despite the industry's anticipated slow sales growth. After years of big-time bottom line losses in the region, that's very welcome news for investors.