The Ford Explorer was the fifth best selling SUV in the United States last year. Ford Motor Company (NYSE:F) sold just under 250,000 Explorers in 2016. That makes the model Ford's fourth best selling vehicle in the US. It is safe to say that the Explorer is important to maintaining and ultimately increasing sales in 2017. With that in mind, the recent reports of mechanical issues related to the Explorer could impact Ford's 2017 top and bottom line results by lowering future sales and resulting in costly litigation matters.
The costs associated with addressing mechanical issues are generally non-material expenses incurred regularly by automakers. The actual costs of repairs are not of real concern to investors, rather the potential public relations impact could be the real catalyst to stay away from Ford's equity until greater certainty is available.
Over the past several weeks various media reports, mostly in local papers and newscasts, have chronicled a similar phenomenon in the current generation (2011-present) Explorer model. Exhaust is allegedly leaking into the cabin creating an unpleasant odor. Of course, the odor isn't the most serious concern. The emissions, including carbon monoxide, carbon dioxide, and nitrogen dioxide, released through the vehicle's exhaust system, creating the smell, can lead to dizziness, headaches, and possible fainting. Operating a vehicle is essentially the least ideal place anyone would opt to faint. While still very rare, incidents are materializing where drivers smelled an odor then became disoriented and were involved in an accident. In one deposition related to the matter, a Ford executive noted that the release of carbon monoxide in the cabin was indeed a structural issue that Ford's engineering team had yet to fully remedy. An analysis of NHTSA reports shows that the company is aware of at least 450 incidents in which exhaust leaked into the cabin causing some level of disorientation for passengers. In some of the cases, drivers passed out and crashed their vehicles. If those accidents were indeed the result of Ford's mechanical oversight, the company could be held liable.
Investors should be having flashbacks to the 2010 accelerator issues that plagued Toyota and Lexus models. That issue, which involved the hybrid models inadvertently accelerating when pressure was applied to the brake on bumpy surfaces, cost Toyota roughly $2 billion between lost revenue and recall costs. The company incurred an additional $1.2 billion charge related to legal costs. Ford, like most automakers, has experience in dealing with public relations issues related to major recalls. The obvious example is the early 2000's Ford Explorer Firestone tire recall. Certain model Firestone tires installed in select Ford SUV models were defective and bursting in high stress scenarios. The recall cost the company a total of about $3 billion.
The current concern over exhaust leaking into the cabin is likely not on par with the aforementioned recalls. That being said, Ford investors should monitor the situation for potential media pickup and ensuing negative publicity. Luckily for Ford, much of the media is preoccupied with national politics and unlikely to diverge from the near constant coverage of presidential statements and incidents.
If, however, the issue does gain national media attention, investors should expect some impact on sales. After the Explorer recall in 2000-01, sales plummeted. Of course other variables impacted sales, but overall the unit volume declined precipitously even as the economy grew from 2003-2008. One takeaway from the declines could reasonably be that consumers were turned off by the damaged reputation of the Explorer.
Ford Explorer unit sales 1991-2011
Source: Ford sales figures
In addition to concerns related to sales, the company could also face litigation matters. Several lawsuits have already been filed but the costs are immaterial to the value of the equity. What could be of greater concern are larger class actions related to health concerns stemming from exposure to exhaust fumes. As noted above, exhaust emits several dangerous gases including carbon monoxide. According to the CDC, low level exposure can result in heart disease and neurological problems. Health related problems experienced in Ford customers could lead to costly class action suits.
It's worth noting that the company isn't sweeping the issue under the rug. At least three fixes have been sent out to dealerships that encounter the complaint from customers, though none have actually fixed the problem. As a result of nearly 450 customer complaints, the NTSB launched an investigation in 2016. A Ford spokesperson noted that the company is cooperating with the investigation and hopes to solve the issue quickly.
Overall, investors should be mindful of a potentially serious PR issue the company is dealing with. Ford has not yet informed investors to the issue because it hasn't reached the level of materiality requiring action. Nonetheless, keeping an eye on the issue can only help keep investors more knowledgeable to make fully informed decisions in respect to their positions in Ford's equity.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.