Ford's Transformation Continues With Solid November Sales

Adam Levine-Weinberg, The Motley Fool

Updated Tue, Dec 4, 2018, 7:35 PM

Ford's third-quarter earnings report, released in late October, showed that these concerns may be overblown. While it may take some time to address weak sales and earnings trends overseas, Ford remains extremely profitable in North America, its home market. The company's U.S. sales results for November should give investors more confidence that Ford can return to earnings growth within the next few quarters.

Temporary headwinds

For most of 2018, Ford's U.S. vehicle deliveries have been on the decline, due to weak demand for traditional passenger cars. The discontinuation of the Focus and C-MAX models in North America has accelerated the pace of decline.

A gray Ford Focus in front of a building

Ford discontinued the Focus compact car for the U.S. market earlier this year. Image source: Ford Motor Company.

For example, in November, Ford's deliveries in the U.S. dropped by 14,468 units (6.9%) year over year. The Focus and C-MAX together accounted for 70% of that drop, as dealer stocks are finally running low. Meanwhile, the car models that Ford is still producing for the U.S. market (for now) collectively posted solid sales growth, which was an improvement from flattish sales in October.

On a slightly more worrisome note, Ford's three high-volume crossover models (Escape, Edge, and Explorer) all posted double-digit sales declines last month. However, Ford management noted that it is being very cautious on pricing and financing for the Escape and Explorer, which will be replaced next year with all-new versions of those models. Ford is sacrificing some sales today to ensure strong launches for its upgraded crossover models next year.

Meanwhile, Ford's trucks and SUVs continue to sell well. F-Series deliveries declined just 0.9% to 72,102 units, which should be enough to lead the industry by a wide margin, while the Ford Expedition and Lincoln Navigator both logged strong sales gains. Ford is shifting workers to the factory that builds those models in order to increase production.

The solid results for all of these pricey models -- along with Ford's disciplined incentive spending -- caused average transaction prices to surge $1,600 to $37,000, reaching a new record.

Strong truck sales are boosting Ford's average transaction prices. Image source: Ford Motor Company.

New models will lift earnings in North America

As noted above, Ford will start selling upgraded versions of the Escape and Explorer next year. Considering that those two models sit in growing market segments and typically represent more than a fifth of Ford's domestic sales volume, these vehicle launches should have a significant positive impact on sales and profitability.

Furthermore, Ford is poised to dramatically expand its lineup of crossovers, SUVs, and trucks. The Lincoln Nautilus went on sale last month (replacing the MKX model) and got off to a strong start. The Lincoln Aviator, which will slot in between the Nautilus and the highly successful Navigator, will go on sale next year.

On the Ford side of the business, the EcoSport subcompact crossover debuted early this year and has been moderately successful. However, it's an entry-level vehicle and priced accordingly.

By contrast, the new vehicles in the pipeline should be far more profitable. Ford will reintroduce its Ranger midsize pickup in early 2019. Later in the year (or perhaps in early 2020), it will challenge Jeep by resurrecting the Bronco nameplate for an off-road SUV based on the new Ranger. A smaller off-road vehicle is also in the works.

North America can carry the load

In 2015, Ford achieved a stellar 10.2% operating margin in North America. Sales of its ultra-profitable F-Series trucks have risen significantly since then, but Ford's year-to-date operating margin in North America stands at just 8.0%.

Rising commodity costs have contributed to this decline in profitability, but the aging of Ford's product lineup has played an even bigger role (by preventing the automaker from recouping its cost increases). Fortunately, by the end of 2019, Ford will have substantially updated its product portfolio, including in some key market segments.

This could send Ford's North American operating margin back into double-digit territory by 2020, potentially providing a $2 billion-plus pre-tax profit boost. If Ford can make even modest progress turning around its international operations -- through a combination of cutting costs, introducing new products, and exiting underperforming markets -- a profit rebound in North America could unlock big gains for Ford shareholders.

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