Ford's Biggest U.S. Problem Is a Good One: Too Few Fusions
Of course, investors are put off by Ford's exposure to Europe's staggering auto economy, its losses in South America and its continuing costs to expand capacity in China. But it is difficult to ignore the automaker's high level of domestic sales success.
In April, Ford's biggest problem, in terms of domestic sales, was that it could not make enough Fusions. Rather, its Fusion inventory was at a bit less than a 40-day supply, compared to its overall inventory supply level of 66 days.
At the Hermosillo plant where Fusion is made, "we're doing everything we can to get out as many as we can," said Ford sales analyst Eric Merkle in an interview. "We would like more inventory, particularly as we get into the summer months."
Ford's solution is to expand Fusion production to its Flat Rock, Mich., plant in the fall.
"By the time that production capacity comes online it will be too late to make much of a dent in 2013, although it will certainly help in 2014," said Kelley Blue Book analyst Alec Gutierrez.
Fusion had its best April ever, selling 26,722 units on a 24 percent sales increase, but "they could have had an even stronger showing had they had additional production capacity," Gutierrez said.
That basically concludes the list of Ford's problems on the domestic sales front last month, and obviously too few Fusions is in some ways a good problem to have.
On the positive side, Ford had strong showings in the top three segments. Pickup trucks, which accounted for 11.5 percent of industry sales, were up a point from the same month a year earlier; sales of the most popular U.S. vehicle, the F-150 pickup truck, rose 24 percent to 59,030. In the small utilities segment, which accounts for about 15 percent of industry sales, up about a point from a year earlier, Escape sales rose 52 percent to 25,826.
Ford announced that starting in the third quarter it will add more than 2,000 jobs at its Kansas City assembly plant to support high demand for the F-150 and for the new Transit family of commercial vehicles. F-150 production will employ about 900 of the new employees, with the rest working on the Transit starting in the fourth quarter. The plant currently employs 2,450 hourly workers.
"Customer demand for today's F-150 is strong and continues growing, the truck segment is growing three times faster than the overall industry, the housing market is strengthening, and we are seeing growth in the U.S. economy," said Joe Hinrichs, Ford president of the Americas, in a prepared statement. "We are going to expand operations in Kansas City to ensure we have enough trucks to meet customer demand."
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Meanwhile, the midsize car segment in April shrank to about 16 percent of industry sales, down two points from its level in the same month a year earlier. While Fusion sales rose 24 percent, Honda Accord sales fell 5 percent to 33,538 units, Toyota Camry sales fell 14 percent to 31,710, Chevrolet Malibu sales fell 1 percent to 21,734 and Nissan Altima sales rose 35 percent to 21,991.
On the GM call, economist Mustafa Mohatarem said midsize cars are losing share to small SUVs. "Fundamentally, both serve the family market," he said. As "midsize products have gotten smaller and more expensive, people are switching to crossovers."
Gutierre said that "a lot of consumers, baby boomers and retirees, are shopping for small SUVs." Ford benefits there, too, he said, because Escape is among the top small SUVs.
In recent reports, both S&P Capital IQ analyst Efraim Levy and Jefferies analyst Peter Nesvold reiterated buys on Ford after the company beat estimates last week as first-quarter earnings rose 15 percent to $1.6 billion, despite losses of $462 million in Europe and $218 million in South America. Ford continues to expect to lose $2 billion in Europe this year.
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Levy wrote that he sees "continued profit pressure in 2013 at Chinese joint ventures as the company invests in sharply increasing its capacity." Also, he said, "margins should be penalized by significant losses in Europe, even as Ford restructures there, and by pressure in South American operations. Higher raw material costs and investment expenses should also weigh on margins in coming years."
However, Levy said, he expects Ford revenue to rise 10 percent this year "as expected healthy U.S. and China growth outweighs weakness in Europe and slowing growth in some other regions." He has a $15 price target. Ford shares closed Wednesday down 24 cents at $13.37, while GM shares were down 67 cents to $30.17. Year-to-date, Ford is up 1 percent, GM is up 2 percent and the S&P 500 is up 11 percent.
Nesvold, who has a $16 price target for Ford, said first-quarter results included "strong profits in North America offset by losses everywhere else with the exception of a small profit in Asia Pacific Africa.
"We admit it doesn't feel great when North America is currently the sole source of profitability," Nesvold said, adding that "there may not be an obvious event on the horizon to trade around, but we think the stock will reward the patient investor."
—By TheStreet.com's Ted Reed
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