Ford's US problem is a good one: too few Fusions

Despite losses in most of its markets, the Detroit automaker's domestic market remains strong.

By TheStreet Staff May 2, 2013 11:34AM

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Ford emblem at the Chicago Auto Show JEFF HAYNES AFP Getty ImagesBy Ted Reed

Of course, investors are put off by Ford's (F) 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 on line 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% 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% 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% to 59,030. In the small utilities segment, which accounts for about 15% of industry sales, up about a point from a year earlier, Escape sales rose 52% 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."

Meanwhile, the mid-sized car segment in April shrank to about 16% of industry sales, down two points from its level in the same month a year earlier. While Fusion sales rose 24%, Honda (HMC) Accord sales fell 5% to 33,538 units, Toyota (TM) Camry sales fell 14% to 31,710, Chevrolet Malibu sales fell 1% to 21,734 and Nissan (NSAMY) Altima sales rose 35% to 21,991.

On the GM (GM) call, economist Mustafa Mohatarem said mid-sized cars are losing share to small SUVs.

"Fundamentally, both serve the family market," he said. "(As) midsized products have gotten smaller and more expensive, people are switching to crossovers." Added Gutierrez: "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% 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.

Levy wrote that he sees see "continued profit pressure in 2013 at Chinese joint ventures as the company invests in sharply increasing its capacity." Also, he wrote, "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% 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 $30.17. Year-to-date, Ford is up 1%, GM is up 2% and the S&P 500 ($INX) is up 11%.

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, "There may not be an obvious event on the horizon to trade around, but we think the stock will reward the patient investor."

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May 2, 2013 2:02PM
Can somebody really tell me why FORD is not performing.
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