Ford: Look out for potholes

ford_dealer.top.jpg By Alex Taylor III, senior editor at large


FORTUNE -- Alan Mulally and company are taking a well-deserved victory lap for their blowout first-quarter results. But looking behind the numbers, there are some potentially troublesome issues in North America that could impact earnings going forward.

Item: Ford (F, Fortune 500) garnered a lot of attaboys for actually boosting margins at a time when customers are once again reacting to higher gas prices by dialing down their vehicle preferences. That's no mean feat for the home of the profit-rich F-series pickup.

But the full impact of higher gasoline prices wasn't felt in the first quarter and may not be for a while. Mike Jackson, CEO of AutoNation (AN, Fortune 500), the U.S.'s largest car dealer, figures the tipping point won't come until gas hits $4.50 a gallon. Let's see how Ford's margins look then.

Item: Ford's U.S. market share sagged to 16% in the first quarter, its lowest in more than a year. This is despite well-received new products like the Explorer crossover and compact Focus. Ford even used some familiar industry levers to boost results.

The first is incentive spending. In March, Ford incentive expenditures exceeded the industry average by about $500 per car sold, according to Edmunds.com. The numbers look no better when compared to average transaction prices: Ford's spending as a percentage of its average price has run ahead of the rest of the industry.

The second lever is fleet sales. By some accounts, Ford sold one third of its vehicles to fleets in the first quarter. Commercial fleet sales are bad for profit margins, rental car fleet sales are worse. "Ford's goal should be to reduce sales to fleet to under 25%," says analyst Jesse Toprak of Truecar.com.

Item: Ford's well-earned reputation for quality is about to take a hit. The company acknowledged as much on Tuesday, saying it "is addressing some near-term issues."

That likely refers to MyFord Touch, its hands-free, voice-activated technology for communicating with the car. The system was the subject of a scathing review by Consumer Reports, which declared that first-time users "might find it impossible to comprehend," and may result in a lower initial quality ranking from J.D. Power and Associates.

The technology has received favorable comments from several reviewers but clearly needs time for users to accustom themselves to it.

Item: Ford has promised to fix its Lincoln brand, but for now it remains a headache. Lincoln sold only about 17,000 vehicles at retail in the first quarter, and the sales were spread across five different models, denting profits.

Says one industry insider: "Highly-fragmented nameplates with low volume tend to lead to aged inventory, higher incentives, and deterioration on the sales lot. They also hurt dealer profits due to higher floor plan expenses."

Ford faces other headwinds as well. Like all manufacturers, the automaker must cope with higher commodity costs -- in Ford's case, an additional $1.7 billion for the rest of the year. With only limited opportunities to offset the additional cost, it must either raise prices or risk margin erosion.

It has been said the auto business is simple: Design, build, and sell great cars and trucks. But within that single truth lie thousands and thousands of ingredients, variables, and decision points -- any combination of which can take the shine off a single quarter's results. It will be interesting to see how Ford fares over the next three months. To top of page

Just the hot list include
Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play
Find Your Next Car
Company Price Change % Change
Advanced Micro Devic... 38.56 0.21 0.55%
General Electric Co 11.52 0.23 2.04%
Bank of America Corp... 32.93 0.23 0.70%
Pfizer Inc 37.28 0.73 2.00%
Cisco Systems Inc 45.09 0.18 0.40%
Data as of Nov 15
Index Last Change % Change
Dow 28,004.89 222.93 0.80%
Nasdaq 8,540.83 61.81 0.73%
S&P 500 3,120.46 23.83 0.77%
Treasuries 1.83 0.02 1.05%
Data as of 10:45am ET
Sponsors

Sections

Bankrupt toy retailer tells bankruptcy court it is looking at possibly reviving the Toys 'R' Us and Babies 'R' Us brands. More

Land O'Lakes CEO Beth Ford charts her career path, from her first job to becoming the first openly gay CEO at a Fortune 500 company in an interview with CNN's Boss Files. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.