Why Hybrids Can Save Ford This Year

| About: Ford Motor (F)

With gas prices reaching record highs this year, averaging $4 or more per gallon, and the economy not at its best, I expected the big auto manufacturers to either suffer or start making some changes to their vehicles. Noticeably, I have seen more and more fuel-efficient cars on the road, which shows that people are starting to opt for affordability over luxury.

Most of the core auto manufacturer's major target market is younger people who are buying their first cars, and currently many of those people are experiencing the wrath of the economy, making it difficult to afford necessities such as vehicles. Ford (NYSE:F), one of America's top automakers, has acknowledged this and begun producing smaller, fuel-efficient, and affordable cars such as the Ford Focus. It really does not make sense to focus on large trucks or SUVs right now, when a typical buyer would have to spend more money on gas than the actual car payment.

Last March, Ford even experienced its best month in five years, with a 5% increase in U.S. sales due to the strong demand for the Focus. According to an article in The New York Times, Ford is going to continue to shift towards more small cars and away from trucks, which I believe is a smart move. Ford has also created the Fusion Hybrid, an affordable hybrid sedan that gets 41 miles per gallon in the city and 36 miles per gallon on the highway, and sells for only $21,500. The Fusion Hybrid was recommended as number one on Kelly Blue Book's "Gas-Mileage Champs" list, and became the first Ford sedan to sell more than 200,000 units in a year since 2004.

I think the increased production of fuel-efficient cars is what led to Ford's increased profit it earned last quarter in North America of $2.13 billion, compared to $1.84 billion in the first quarter of 2011. Even though Ford's vehicles are a bit pricier than other hybrid car options, higher sales are being made due to the increasing gas prices, which make it logical to purchase a car that does not require as much gas.

Also experiencing an increase in revenue due to fuel-efficient car sales is General Motors (NYSE:GM). Last March, General Motors reported that sales rose 12% for the month, and it was the first time it had sold over 100,000 fuel-efficient vehicles, which made up about 40% of overall sales. General Motor's plug-in hybrid, the Chevrolet Volt doubled in sales from February to March, although I am not entirely confident that the plug-in car concept is as efficient as Ford's hybrid models, which generate power through usage. You can always stop to get more gas, but what happens if you forget to recharge?

Toyota (NYSE:TM) experienced a net profit drop of 13.5% due to the unfortunate tsunami disaster in Japan, which caused cutbacks at the manufacturing hub of Thailand, severely hurting production. It is expecting to bounce back soon with its own fuel-efficient vehicles like the new versions of the Prius, a gas-electric Hybrid, and the hybrid Lexus. Clearly, it is evident that the majority of sales being made by all car companies are due to the production of affordable and fuel-efficient models, as March was one of the highest months for car sales.

Honda (NYSE:HMC) produces the cheapest fuel-efficient vehicle, the Civic Hybrid, which sells for around $16,545 and gets 40 miles per gallon in the city and 45 miles per gallon on the highway. Despite the affordability of its hybrids, I do not think the cars are bringing in enough revenue since it missed its expected revenue and earnings. Nine analysts polled by S&P Capital IQ had expected to see revenue of $30.01 billion, but Honda reported revenue of $29.18 billion. Honda does not have the same reputation for quality and safety that Ford has which could be a deciding factor for many customers.

Luckily, Ford's main market is in North America, since the European debt crisis is severely affecting the amount of car sales overseas. With the high unemployment rate leaving a large number of young people jobless and cutting the main new car market nearly in half, all of the car companies are hurting in this category. Ford will do well enough in North America to cover for any losses it may experience in Europe. The same cannot be said for General Motors, which reported losing $747 million on its European operations in 2011 for the 12th straight year of losses in Europe.

Japan carmaker Hyundai (OTC:HYMTF) has been gaining market share in the lower end of the market with its i30, which competes with the Ford Focus, but is relatively cheaper. The problem with inexpensive cars, however, is that they do not generate as much revenue as expensive ones. Ford has had trouble competing at the high end of the market against Daimler-owned Mercedes-Benz (OTCPK:DDAIF), BMW, and Audi, owned by Volkswagen (OTCPK:VLKAY), which all continue to maintain high sales and revenue, even with its high priced and non-fuel-efficient luxury vehicles.

Sales of expensive luxury vehicles remain stable because the majority of buyers capable of purchasing them initially still are able to continue to purchase new ones. Ford may be considering introducing the classic sports car, the Mustang in Europe to try to spice up its line of vehicles, but it risks financial losses considering that the Mustang is neither affordable nor fuel efficient, yet may attract customers outside of the middle-class.

I think Ford holds the advantage over the rest of the car companies of focusing its production of affordable and fuel-efficient cars mainly in North America. It should continue to produce more options for hybrids, since there are constantly more and more being produced by other competing companies. As for its involvement with Europe, I think it should consider lowering the prices of its fuel-efficient car options in order to make them more affordable for the dwindling middle class. It should attempt to introduce the Mustang, I think it will give the company a more appealing appearance that may lure in higher paying customers and thus an increased revenue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.