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Ford's Earnings Improving. But It Suffers From Poor Hedging


Ford’s overall first-quarter results over-achieved Wall Street forecasts. But let’s look at the most important slice of the Ford pie—The Americas—and see how ripe or rotted the fruit really is.

Ford’s North American unit, which is headed by executive vice president Mark Fields, continued to deteriorate, with a pretax loss of $614 million. That’s worse than the $442-million pretax loss posted during the same period a year ago. Revenue for the division was $18.2 billion, down from $19.8 billion during the same period a year ago. Ford made the stunning admission that the biggest driver of that result is that fewer consumers are choosing Ford vehicles.

A quick look at the first quarter sales of Ford, Mercury and Lincoln sales in the U.S. tells us a lot.

Explorer sales are down 26%, or about 12K sales. F Series pickups are off 14% or about 28K sales. The company shut down the Taurus, and that’s a loss of 51,000 (fleet)sales in the quarter. Declining sales of the SUVs and pickups is a function of fuel prices climbing, truck-based SUVs falling out of fashion as family vehicles and pickup trucks sales decline along with a softening home sales market, and declining interest on the part of the weekend Lowe’s warrior to have a pickup as the second car.

Those are market forces affecting Ford’s bread-and-butter vehicles.

Where Ford’s vehicle business is really hurting is that it is miserably hedged against those market forces. Hedged, you say, Kiley? If people are deserting those segments, then a successful and robust company must have competitive vehicles to which it can attract those people changing their minds about the kinds of vehicles they want.

Ford has a few good hedges. The Ford Fusion/Mercury Milan/Lincoln MKZ are doing well, and are on track to sell 192,000 vehicles this year. The new Ford Edge is on track to sell 100,000 crossovers this year. That’s not bad for a new nameplate. The new Expedition is so good in a slumping big SUV category that sales are up in a healthy way, and it will sell 100k this year.

The bad news is that Ford has a series of vehicles that are under-delivering because their designs are not as compelling as rivals’, or the company has so badly mucked up the marketing of the vehicles that they aren’t adequately compensating for the decline in trucks and SUVs. I call these vehicles bad hedges. These are vehicles so mediocre, or so badly positioned, that when a Ford customer trades out of an excellent Explorer, Expedition or F Series, the Ford alternatives don’t come close to measuring up. To get a crossover or utility wagon as good as an Explorer or Exppedition or pickup, customers have been driven to other dealerships.

The Five Hundred is down 27%, or 6,000 vehicles in the quarter, and too many of those sales are showing up in rental car lots. The Freestyle crossover, a vehicle in a hot and desirable segment, is down 42% or 7,000 vehicles. The redesigned Ford Escape, another crossover in that hot small SUV segment, with a hybrid version to boot, is down 10%. There is no excuse for Escape sales to be down except for shortcomings in styling, packaging and marketing. Yes, Ford has been getting a new redesigned Escape to dealerships, and I’m sure they’ll tell me that was the reason for the falloff. Maybe.

The Ford Focus should be in the thick of a resurgence among small, fuel-efficient cars. Instead, sales are down 6% even with huge incentives. Unfortunately, Ford has under-invested in this product and had to so saturate the car with rebates that it has taken on a “loser” image.——more

It’s ironic that one of the big reasons Ford lost effective hedging in its product portfolio is the power of its financial department over the last decade-plus. Finance guys who loved the fat returns on pickup trucks and SUVs happily greenlighted such vehicles as the Lincoln Aviator, Ford Excursion, Lincoln LT, Lincoln Blackwood. They chiseled features and cost out of the Escape, Freestyle and Edge that would have made them more competitive and attractive. Finance guys are supposed to be obsessive about hedging—-making sure they are covered financially with interest rate derivatives and the like when currency or cost of precious metals swing violently. But it seems they didn’t apply the same thinking to the actual product portfolio…as in…asking…”What happens if the bottom falls out of the truck-based SUV segment? What happens if the housing market goes soft sooner than we think and sales of trucks sink? Where will profits come from then? What do we have for customers to trade into?

To look at Toyota’s first quarter sales and product portfolio is to marvel at its product portfolio hedging. We know that Toyota is having a tough time launching the Tundra pickup; that it’s discounting the BeJesus out of the truck. Too, Sequoia sales are down 24%. Sienna minivan sales are down 13%. Land Cruiser sales are down 23%. 4Runner sales are down 14%. Sales of the Lexus heavy SUVs are down double digits. But looking at Toyota sales model-by-model shows how well the company hedges. Prius sales are up and on track to sell 120,000. Matrix/Corolla sales are up almost 10% and on track to sell 350,000 this year. 350,000!!!! It came out of nowhere with the FJ Cruiser , a clunky driving and awkwardly packaged, but cool looking, SUV that is on track to sell 65,000 this year with almost no marketing spending. The Yaris small car, which Consumer Reports and other magazines have panned, came out of nowhere and will sell around 80K vehicles this year as a certain class of consumers opt for small and fuel efficient as a “hedge” against gas prices staying above $3.00 per gallon.

The Toyota RAV4 is up 22% the way it should be. Ford has no answer, no answr!, for Toyota’s three Scion cars, the Yaris, the Sienna minivan, the Prius, the Tacoma small pickup (the Ranger is so old it cannot be judged a real competitor). And while the Ford Fusion is a legit competitor to the Camry and the Focus a legit competitor to the Corolla, Ford simply isn’t known for top-drawer sub-compact sedans or compact sedans the way Toyota is. And that’s because……?

Ford isn’t known for offering competitive, compelling vehicles in those two segments; two segments in which Toyota will generate almost 800K sales this year with three vehicles, compared with 360K for Ford, which it will achieve with four vehicles.

Well, you asked me what the crux of Ford’s problem is…..


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