Ford Realizes Higher Transaction Prices

Ford (F) held its monthly sales conference call on June 2, 2009. While scanning a summary of the call, my eyes widened when I read that Ford achieved higher transaction prices in May. Given my continuing confidence that the Federal Reserve will win the battle against fears of deflation, I am always (opportunistically) alert to any evidence that inflation is taking root in the economy. Still...how could a car manufacturer, of all companies, accomplish ANY pricing power in this recessionary environment? I decided to listen to the call to get the full context.

It turns out that changes in product mix drove the average transaction price higher: consumers bought well-equipped, higher-end models. Ford also reduced incentive spending although it was not clear to me whether this factored into average transaction price. Ford got a bit stingier, marketed and sold higher-end features, and its customers ate it up even as industry conditions remain tenuous at best. The strength in demand occurred in the last third of May. Here is a summary of the pricing and demand-related commentary from the conference call:

1. May was Ford's highest volume month since July, 2008.
2. May was Ford's highest share month in 3 years. It was the only volume brand to deliver year-over-year incentive reductions and still gain market share.
3. Average transaction price was pretty strong and up from last year, all driven by new product. Customers bought well-equipped models. For example, a very high percentage of customers purchased the 3-series, the sport, the hybrid, and the SEL Fusion, and not as much of the lower-end. Consumers are also going more for well-equipped F-150 trucks. Ford acknowledged that 12 months from now could be a different story.
4. Average incentives were up $500 for the industry year-over-year (YoY). Ford's incentives were down $200, YoY and month-over-month. Industry incentive spending may have been down $300 month-over-month excluding inventory liquidations.
5. Ford expects to see a lot of fire sales by competitors, especially as motivated dealers clear out inventory.
6. Ford raised 2nd quarter production plans by 10K units to 445K; 3rd quarter's plan is for 460K units, a 42K YoY increase.
7. May results should be interpreted with some caution given the volatility in the marketplace. It is dangerous to extrapolate a straight line from May's success to the rest of the 2nd half. The industry remains fragile.
8. On a related note, Ford emphasized that it is very earnestly encouraging the government to pass "cash for clunkers" legislation.

On that last point, Ford was clearly trying to deliver a nuanced message: conditions are getting better and are encouraging, but conditions are still bad enough to warrant government assistance. If Ford still needs government assistance then it is too early to get excited about Ford's results. Ford's stock was up 4.6% on the day, and it has now quadrupled from its February 52-week and multi-decade low.

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Comments

[natedizzog2003:]

FORD IS STILL AROUND BECAUSE IT DECLINED GOVT. ASSISTANCE. PEOPLE BUY THEIR CARS BECAUSE ITS STILL A INDEPENDENT INSTITUTION FREE TO RUN THEIR BUSINESS AS THEY SEE FIT AS WELL AS QUICKLY IMPLIMENTING STRATEGIES WITHOUT PANDERING TO WASHINGTON. BEING PART OF THE BIG THREE LABEL HAS HURT THEM A LITTLE BUT KNOW ONE IS BLIND TO SEE THAT THEY ARE STILL STANDING. IN CAPITALISM THERE ARE WINNERS AND LOSERS SO FAR TAKING GOVT. HELP MAKES YOU A LOSER IN THIS COUNTRY. JUST ASK GM AND CHRYSLER THEY WILL TELL YOU THAT TAKING BILLIONS FROM UNCLE SAM DID NOT SAVE THEM FROM BANKRUPTCY.

Jun 04 10:27 AM

[buyforeclos...:]

Looking at fords fundamentals ( isn't that really why one should buy a stock? ) They are brutal....I mean atrocious... I don't care if they are the last man standing in the US it will take 2-3 years before they can make a buck IMHO and stop burning cash

Jun 04 11:51 AM

[User 306736:]

Way too simplistic :(

Jun 04 01:18 PM

[SouthernCEO:]

If things don't change Ford may well find themselves selling their soul to Uncle Sam. I hope not.

Jun 04 03:18 PM

[Tdot:]

Ford openly admits it is still a very long way to go before profitability - 2011 now is the target. In the meanwhile it is a matter of trying to be "less bad" than before. The uptick in May was perhaps a nice touch, maybe not totally unexpected; but only possibly a harbinger of a long term trend or things to come.

Small market share increases in an otherwise way down market environment almost always falls into the "noise" category, given the massive turbulence in the news. Whether it lasts is a big question mark. Although it could be said there is cleary a trend (or an assumption of one) of former / traditional Chrysler and GM customers, and even perhaps some foreign brends, looking to Ford as a "patriotic" home-grown alternative. In any case, supply and demand drives pricing, and right now there is a little more demand for Ford, and a little less supply, due to previous production cuts. And folks have gotten accustomed to "loaded" lease cars and SUVs, replaced every couple of years, and many don't want to give up options they liked.

Every month that goes by with significantly lower auto industry sales is driving an even deeper pendulum swing to one side. The "potential energy" in the form of pent-up demand is growing every month that does not see annualized sales in the 12-13 million range, which is considered "probably sustainable". At some point the dam holding back the customers is going to start to break up, and folks are going to have to go out and replace vast numbers of vehicles. It is just a matter of time. if Ford is positioned to serve those customers, then they will pick up more share, and prices will rise as stocks are depleted.

Nevertheless, there will always be some active and loud anti-Ford groupies (Found On Road Dead, Fix Or Repair Daily) who have prejudices dating back to the Nixon administration, that will "never" (again) buy or own a Ford product, regardless of how "good" it might be.

Jun 04 03:43 PM

[Ellito:]

Ford or new GM should team -up or partner with Greenchek Tecnology Co. (GCHK) to produce Hydrogen fuel vehicles.
GCHK recently set up manufacturing facility in China and ready for big production there. China knows what's best for them. Ford should too.
America should encourage such technology at all cost. Otherwise, every country will be ahead of USA.

Jun 04 08:02 PM

[Jonathan Ch...:]

Mulally is the name and and Productivity is the game. Alan Mulally was one of the two finalists to run Boeing, one of the best US companies ever. With him at the helm Ford has a real chance to regain it's position as #1 in US auto production - lost many years ago to GM.

Agreed that the financial numbers look really bad. But they are bad for every auto manufacturer. Auto production is a very high base-cost business. It cost hundreds of millions per day jsut to keep the doors open, so when sales drop, losses pile up at an unbelievable rate.

But the opposite is also true - when sales rise, profits skyrocket. When the economy recovers next year - and it will, Ford will go gangbusters.

I am long Ford (3500 shares) and long Ford bonds.

Jun 05 07:49 AM