Ford Attempts To Pivot

| About: Ford Motor (F)
This article is now exclusive for PRO subscribers.

Summary

The US auto industry is reaching maturity as Ford sees domestic sales beginning to stagnate.

This is partially offset by growing Chinese and European sales; however, these operating regions are in their infancy and will require time to reach comparable operating profits.

Ford is attempting to pivot away from being a traditional pure play auto-manufacturer to a jack-of-all-trades.

It's nearly impossible to predict the outcome, but it will certainly be a sight to behold as this mature behemoth attempts to reinvent itself.

The auto industry has reached an interesting point in its maturity with domestic sales slowing while certain developing markets are beginning to hit stride. This sets an interesting scene for Ford (NYSE:F) as they try to adapt to an evolving auto market.

The Traditional Ford

The Ford of old was a very focused auto-maker with a single goal in mind: manufacture and sell quality cars and trucks to their retail and fleet customers. This was their bread and butter, and they were very good at it. However, recent trends in the auto market suggest that this strategy, particularly on the domestic front, may be growing stale. In the month of September, typically a strong month for Ford, they've seen drops in both retail and fleet sales across their product mix.

In their September US sales letter, Ford reported an overall decrease in US revenues of 8% as compared to a year ago. This was punctuated by F-Series' Sales down 3% in its strongest retail month of the year. As an advocate for Ford, these statistics are a bit troubling. With that said, international sales were much stronger with Chinese sales up 11% YTD and European sales up 6.7% YTD in the traditional European markets including Germany, France, Britain and so forth.

While these international sales are heartening, they certainly do not solve the issue of slowing domestic sales figures. This is driven by the fact that the vast majority of Ford operating profits are made in the United States.

Source: Ford Q2 Earnings Report

To me, this seems like compelling evidence that in the short term a slowdown in the US auto market will be very impactful on Fords bottom line. It will take some time for Ford to find itself in the black on some of its international operations in order to offset slowing domestic profits.

As I say that, I want to emphasize that I don't see that as a "bad" thing. Truthfully, we are just seeing the natural progression of a maturing business. As domestic sales stagnate, Ford invests heavily overseas, with initial losses that I expect will turn positive before too long.

So in terms of Fords traditional business of automobile manufacturing and sales, yes, I think they are reaching a critical point requiring capital expenditure and growth to maintain profits. However, Ford is also showing interest in a number of different ventures which may help them retain the overall growth they have enjoyed within the US market for the past decades.

Pivoting

I am of course talking about the soul-searching mission of sorts that Ford is pursuing. As Ford chairman Bill Ford Jr. put it, "To me, it's a way to reinvent this company that makes it incredibly relevant for the next 50 years. If we did nothing, we could be consigned over time to an ever-dwindling number of traditional car and truck buyers."

This statement was compelling to me. And I agree with it. Ford cannot rely on what has worked for them for the past 10, 20, or even 50 years; it simply won't yield the same results it has in the past.

This is where it starts to get interesting. How is Ford choosing to pivot and reinvent themselves? Well, apparently through various investments and partnerships in the self-driving automobiles, electric vehicles, ride-sharing services, and much more.

Source: Ford Investor Day, September 2016

While at its core Ford will still be an auto manufacturer, it seems that they are reshaping themselves into some hybrid conglomeration of an analytics, services, management, financing, ride-sharing, and manufacturing company. On paper this sounds great, but shortcomings typically present themselves in the execution.

I do have to say that it's refreshing to see Ford reacting to changing market dynamics. I think that it's correct for them to grow their core business overseas while also evolving and adopting new business units at home. However, I question whether or not this traditional auto-manufacturer can successfully become a jack-of-all-trades (of sorts).

I'm sure that no one can answer that question definitively as it plays out. In the meanwhile, I'll be following Ford closely as they develop and implement these new business strategies. If they succeed they could truly become an evolved and innovative tech company who also manufacturers automobiles. If they fail, they will fall back into pure play auto-manufacturer purgatory (while also blowing through a whole load of cash and investment capital).

Personally, I'll be enjoying the show. It's rare to witness a company of this maturity attempt a reinvention of such magnitude. I imagine the coming years will be extremely interesting indeed.

So What Now?

As investors, we need to act on the information present. Ford is currently trading near their 12 month low. The market seems to be pricing in this cyclical maturity that the US auto market is apparently reaching

F Chart

F data by YCharts

So we ask ourselves, what should we do with Ford stock that we currently hold or are considering purchasing? Unfortunately, as heavily hinted by my previous sections, this is incredibly ambiguous. The answer is, it depends. It depends on how successful Ford is in transforming and evolving their core business as an auto manufacturer. It depends on the success and growth of the global auto market. It depends on whether or not the domestic auto market really has reached maturity. And it depends on how effective Ford management is at executing in all of the above.

Personally, I will be holding on to my current Ford position, but will not be adding any more. Regardless of what happens, I don't think it will happen within the next year, or two, or even three. So, while I do enjoy the nice dividend yield on my current shares, I think there are probably much more sound investments out there, certainly over the shorter term.

I would tread carefully here. Although I do admit that the downside with Ford is probably limited, any upside could take YEARS to form. But hey, perhaps you know more than me. Perhaps this is a great ticker to park your cash in and collect the healthy dividend while waiting for the breakout. For me at least, only time will tell.

Disclosure: I am/we are long F.

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.