When we talk about Ford’s (F) sales and overall business results, the conversation normally turns to the F-series pickup trucks, with the 150 version being the volume seller. However, Ford has not gotten rid of everything else in its portfolio, thank heavens. So, what comes next for Ford to create other best sellers in its portfolio?
Here is Ford’s U.S. top-3 list for Q1 2019, as measure by unit volume:
As you can see in the table above, the F-series delivered the slightest increase from the previous year, but the next two Ford U.S. best-sellers had a rougher time. The Escape was down 9.9% and the Explorer was down 1.5%.
If you didn’t know anything else, you’d say that’s really bad. SUVs in these sizes are the rare light vehicle segments that are supposed to be up in the U.S. market this year, despite the slight market decline overall, led as usual by sedans.
However, in Ford’s case, there's an explanation. Both the Escape and the Explorer are on the cusp of an all-new generational change-over. The new generations of each were shown in early 2019, and are going into production very soon.
As it happens, when an automaker switches over to a new generation of a vehicle, at least two things impact sales negatively:
The car is old to begin with and has lost its competitiveness other than what can be defended with price cuts.
Production of the old generation must stop, in order to make way for the new tooling and other manufacturing processes.
For those reasons, it ought not be a surprise that the Escape and Explorer were down in Q1 and will likely be down again in Q2. So when should we expect to see a reversal of fortune for Ford’s two best-selling SUV nameplates?
The Explorer is first, arriving in U.S. dealerships probably in July. The Escape is some time later. I'm not sure, but as best I have been able to figure out, September-October seems likely.
Both the Escape and the Explorer have a couple of new tricks in their new generations that were unavailable before and should expand their addressable market starting in the second half of 2019 and coming into full bloom by the middle of 2020.
Ford Explorer: Hybrid version for the first time
First, the Explorer: It will have a hybrid version for the first time, as well as an ST sports version. Toyota (TM) is selling approximately 11,000 hybrid RAV4s per month now, or approximately 25% of their total: Sales Chart. That's a high take-rate for the hybrid version, that not many people anticipated only a couple of years ago.
Therefore, if those hybrid sales would be incremental to the Explorer’s annual sales, that would indicate over 57,000 incremental annual units to the 227,732 that Ford sold in the U.S. in 2018. At an average transaction price of $60,000, that would mean $3.4 billion in incremental revenue from the hybrid Explorer alone.
Ford will also sell a plug-in hybrid version of the Explorer - but at least initially, only to the European markets. Initially, on U.S. soil, the plug-in hybrid version will be in the Lincoln Aviator only - the Explorer’s premium sister vehicle.
Ford Escape: Both hybrid and plug-in hybrid versions
It’s a very similar story with the Escape. It too gets a hybrid version in this all-new generation, and the analogy with the Toyota RAV4 is even more direct, given that it is the same class (size) of vehicle. Therefore, imagine a potential of a 25% take rate. Applying that to the Escape’s 2018 U.S. sales number of 272,228, it could mean an incremental 68,000 units.
A hybrid Escape would be approximately half the price of a hybrid Explorer, so we can estimate 68,000 units multiplied by $30,000, or $2 billion in incremental revenue. Add the $3 billion from the hybrid Explorer, and we have a realistic $5.4 billion annual revenue upside to Ford coming from these two hybrid versions.
It does not stop there, however. The Ford Escape also will come in a plug-in hybrid (PHEV) version, although only in front wheel drive. This will be an attractive form factor, but if you look at plug-in hybrids that are not all-wheel drive, you can see that they rarely sell much more than 1,000 units per month in the U.S. For that model, figure 12,000 units per year at $35,000, or $420 million in incremental revenue potential.
Add it all up, and you get to an approximate $5.8 billion annual lift in Ford revenue from these electrified versions of its two most popular SUVs in the U.S. alone - and that’s assuming that the non-electrified versions don’t grow at all. If you look at this on a global basis, the number clearly has upside potential well above $5.8 billion.
Investment conclusion: $5.8 billion extra revenue from Ford’s U.S. sales
Based on these calculations, and all other things equal, investors should expect Ford to generate an incremental estimated $5.8 billion in revenue from its U.S. business, on an annual run-rate basis, by the middle of 2020, based on these models rolling out between the middle of 2019 and the first half of 2020.
Investors started sensing a turnaround at Ford in April 2019, with the stock jumping a double-digit percentage from where it began the year around $8 per share. This analysis calculates that there's a lot more good news coming, all other things equal.
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Disclosure: I am/we are short TSLA. 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.
Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers. Ford and Toytoa hosted product intros.