What's Wrong With Ford

| About: Ford Motor (F)


On Thursday, Ford announced Mark Fields would become CEO on July 1.

Also on Thursday, Ford announced a surprise drop in April sales while other manufacturers reported robust numbers.

Coupled with a weak first quarter, Ford has been a market share loser in 2014, which is a concerning trend amidst a CEO transition.

Ford is too cheap to sell, but investors should look to other auto manufacturers like GM.

On Thursday, Ford (NYSE:F) made the well telegraphed announcement that Mark Fields will be replacing CEO Alan Mulally on July 1 (press release available here). Without a doubt, Mulally is one of the best CEOs in this young century. Upon taking the job, he added debt before the credit market froze, allowing Ford to survive the financial crisis while General Motors (NYSE:GM) and Chrysler were forced to seek government assistance and file for bankruptcy. He also successfully cut costs, expanded into China aggressively, gained North American market share, improved car quality, and built a more cohesive corporate culture. While you can't be glad Mulally is stepping aside, Fields has been groomed for years and will continue with the strategy Mulally has put in place. I would not sell shares simply because Mulally is retiring, but I am increasingly concerned that problems are developing at Ford.

Great CEOs often know when to leave and leave at the top. Shares of General Electric (NYSE:GE) have fallen in the twelve years since Jack Welch retired while IBM has struggled since CEO Sam Palmisano stepped aside. There are many more examples of companies that faced problems after a great CEO retired. I am concerned that Mulally, like many other great CEOs, is retiring right as problems begin to appear. Last week for instance, the company reported disappointing quarterly results, and on Thursday morning, Ford reported very troubling April monthly sales.

Ford reported a year-over-year drop in sales of 0.7% while analysts were looking for a gain of 3% (details available to say). Needless to say, Ford underperformed in April. More importantly, Ford was the only major disappointment as overall sales jumped around 6%. Nissan (OTCPK:NSANY), Toyota (NYSE:TM), and Chrysler saw double-digit increases, and even GM saw a 7% jump (details available here). Ford didn't miss because the auto market was unexpected weak; Ford missed because it lost market share. That is concerning. It is also worrisome that Ford underperformed GM in the month. Given all of the terrible press over the recall, one would have expected GM to report lousy April numbers. Instead, it actually increased sales. For Ford to lose share to GM is surprising and deeply concerning.

Now, Ford is launching 23 new models this year, most notably an all-aluminum F-150. There is the possibility that some consumers are delaying purchases until the new models are released in the second half of the year. This phenomenon is why I have argued 2014 is mainly a transition year, and 2015 will be much better as Ford could earn $2.00 per share. However, it does not look like new launches hurt April's sales as the F-Series actually saw an increase of 7.4% year over year. Truck sales overall were up a solid 8%, and cars were down by 9.1%. Lincoln was an exceptionally poor performer with sales falling 10.7%. Ford has been unable to position Lincoln as a truly luxury brand.

Simply put, consumers shunned Ford in favor of GM and the other manufacturers. Only time will tell if this is a temporary factor or a trend. However, it is worrisome, and investors will need to continue to watch Ford's market share to see if it is losing favor among consumers. In the disappointing first quarter (financial and operating details available here), Ford ceded 0.6% of market share as volumes fell 2.4%. It is now clear that Ford ceded share in a fourth month; 2014 has gotten off to a very rocky start.

When we combine the weak first quarter with lousy April sales, it is evident that Ford is facing headwinds in the critical North American market. Couple this with Mulally's departure, and the company could have serious problems over the next 6-12 months. It is now even more important that new product launches go well. Over the past six months, the operating performance of Ford has regressed. Now, I would not panic and sell shares because they are so cheap, about 8x 2015 earnings. However, I do not see immediate-term upside. Declining market share may be transitory, but Ford faces heightened scrutiny in coming weeks to see if the problems run deeper. I would rather buy GM, which trades at a similar multiple and has been able to increase sales despite the bad headlines it faced.

Disclosure: I am long F, GM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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